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Monday, February 19, 2007

Investment Lags

by Calculated Risk on 2/19/2007 01:10:00 PM

By how many quarters does Non-residential Investment lag Residential Investment?

There are two components of non-residential investment: 1) equipment and software, and 2) non-residential structures. The following graphs shows how the YoY change in investments, in equipment and software and structures, correlates with residential investment with lag times between zero and seven quarters.

Click on graph for larger image.

The highest correlation for equipment and software is a lag of 2 to 3 quarters, and for structures a lag of 4 to 5 quarters. There is a positive correlation for other periods also.

The YoY change in residential investment turned negative in Q2 2006 (quarterly residential investment turned negative in Q4 2005).

For equipment and software, investment declined in two of the last three quarters. With a lag of 3 quarters, the YoY change would turn negative in Q1 2007. Of course the lag might be longer, or YoY investment might not turn negative this time.

For non-residential structures, a lag of 5 quarters would suggest the YoY change would turn negative in Q3 2007. The quarterly change in structure investment slowed significantly in Q4 2006, but it was still positive.

Note: The correlation used data by quarter since 1960. There are 44 degrees of freedom (since some of the YoY changes are not independent). We can be 99.9% confident that residential investment and equipment and software are positively correlated, since 1960, with lags of between 1 and 4 quarters.

We can be 99% confident that the YoY change in investment in non-residential structures and residential are positively correlated with lags of between 3 and 6 quarters.