Friday, October 31, 2014

Q3 GDP: Investment Contributions

by Bill McBride on 10/31/2014 05:31:00 PM

This is one of my favorite GDP graphs. The graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Note: This can't be used blindly.  Residential investment is so low as a percent of the economy that the small decline earlier this year was not  a concern.

Investment ContributionsClick on graph for larger image.

Residential investment (RI) increased at a 1.8% annual rate in Q3 - and RI only contributed 0.06 percentage points to GDP growth.  For the rate of economic growth to increase, RI will probably have to make larger positive contributions to economic growth.

Equipment investment increased at a 7.2% annual rate, and investment in non-residential structures increased at a 3.9% annual rate.  Equipment and software added 0.41 percentage points to growth in Q3 and the three quarter average moved down slightly (green).

The contribution from nonresidential investment in structures was also positive in Q3.  Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery. 

I expect to see all areas of private investment increase over the next few quarters - and that is key for stronger GDP growth.

Q3 2014 GDP Details on Residential and Commercial Real Estate

by Bill McBride on 10/31/2014 02:30:00 PM

The BEA has released the underlying details for the Q3 advance GDP report today.

Investment in single family structures is now back to being the top category for residential investment (see first graph).  Home improvement was the top category for twenty one consecutive quarters following the housing bust ... but now investment in single family structures is the top category once again.

However - even though investment in single family structures has increased from the bottom - single family investment is still very low, and still below the bottom for previous recessions. I expect further increases over the next few years.

Residential Investment ComponentsClick on graph for larger image.

The first graph is for Residential investment components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, Brokers’ commissions and other ownership transfer costs, and a few minor categories (dormitories, manufactured homes).

Investment in single family structures was $190 billion (SAAR) (almost 1.1% of GDP).

Investment in home improvement was at a $180 billion Seasonally Adjusted Annual Rate (SAAR) in Q3 (just over 1.0% of GDP).   

Office Investment as Percent of GDPThe second graph shows investment in offices, malls and lodging as a percent of GDP. Office, mall and lodging investment has increased recently, but from a very low level.

Investment in offices is down about 47% from the recent peak (as a percent of GDP) and increasing slowly.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 59% from the peak.   The vacancy rate for malls is still very high, so investment will probably stay low for some time.

Lodging investment peaked at 0.31% of GDP in Q3 2008 and is down about 66%.   With the hotel occupancy rate at the highest level since 2000, it is likely that hotel investment will probably continue to increase.

These graphs show investment is generally increasing, but from a very low level.

Preliminary: 2015 Housing Forecasts

by Bill McBride on 10/31/2014 11:32:00 AM

The NAHB released their 2015 housing forecast today. Towards the end of each year I collect some housing forecasts for the following year, and it looks like most analysts are optimistic for 2015.

Here is a summary of forecasts for 2014. In 2014, new home sales will be around 440 thousand, and total housing starts will be close to 1 million.  No one was close on New Home sales (all way too optimistic), and Michelle Meyer (Merrill Lynch) and Fannie Mae were the closest on housing starts (about 10% too high).

In 2014, many analysts underestimated the impact of higher mortgage rates and higher new home prices on new home sales and starts.

Note: Here is a summary of forecasts for 2013. In 2013, new home sales were 429 thousand, and total housing starts were 925 thousand.  Barclays were the closest on New Home sales followed by David Crowe (NAHB).  Fannie Mae and the NAHB were the closest on housing starts.

The table below shows a few forecasts for 2015 (I'll update these in December).

From Fannie Mae: Housing Forecast: October 2014

From NAHB: Single-Family Production Poised to Take Off in 2015

I don't have Moody's Analytics' forecast, but Mark Zandi, chief economist at Moody's Analytics said today "that single-family starts could be closing in on 1 million units by the end of 2015 and multifamily production could go as high as 500,000 units."  That seems too high.

I haven't worked up a forecast yet for 2015.

Housing Forecasts for 2015
New Home Sales (000s)Single Family Starts (000s)Total Starts (000s)House Prices1
Fannie Mae5237831,1704.9%2
Merrill Lynch5571,2003.6%
Wells Fargo5357601,1103.2%
Zillow  3.0%3
1Case-Shiller unless indicated otherwise
2FHFA Purchase-Only Index
3Zillow Home Value Index, Sept 2014 to Sept 2015

Final October Consumer Sentiment at 86.9, Chicago PMI increases to 66.2

by Bill McBride on 10/31/2014 09:03:00 AM

Consumer Sentiment
Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for October was at 86.9, up from the preliminary reading of 86.4, and up from 84.6 in September.

This was slightly above the consensus forecast of 86.4. Sentiment has generally been improving following the recession - with plenty of ups and downs - and a big spike down when Congress threatened to "not pay the bills" in 2011.

This was the highest level since 2007.

Chicago PMI October 2014: Chicago Business Barometer Up 5.7 Points to 66.2 in October, New Orders Rise Sharply to the Highest Since October 2013

The Chicago Business Barometer rose 5.7 points to a one year high of 66.2 in October, fuelled by a double digit gain in New Orders. ...

New Orders was the strongest component of the Barometer and increased sharply to 73.6, the highest level since October 2013. ... Employment increased to the highest level since November 2013, a potential sign that the recovery is becoming more entrenched.
emphasis added
This was well above the consensus forecast of 60.0.

BEA: Personal Income increased 0.2% in September, Core PCE prices up 1.5% year-over-year

by Bill McBride on 10/31/2014 08:36:00 AM

The BEA released the Personal Income and Outlays report for September:

Personal income increased $22.7 billion, or 0.2 percent ... in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $19.0 billion, or 0.2 percent.
Real PCE -- PCE adjusted to remove price changes -- decreased 0.2 percent in September, in contrast to an increase of 0.5 percent in August. ... The price index for PCE increased 0.1 percent in September, in contrast to a decrease of 0.1 percent in August. The PCE price index, excluding food and energy, increased 0.1 percent in September, the same increase as in August.
Personal saving -- DPI less personal outlays -- was $732.2 billion in September, compared with $702.0 billion in August. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 5.6 percent in September, compared with 5.4 percent in August.
A key point is that the PCE price index was only up 1.4% year-over-year (1.5% for core PCE). This is still below the Fed's target.

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