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Wednesday, April 30, 2008

Non-Residential Investment: Still the Key

by Calculated Risk on 4/30/2008 11:41:00 AM

After the Q4 GDP report was released, I wrote: Non-Residential Investment: The Key?

The good economic news in the Q4 GDP report was that non-residential investment was still positive. Investment in non-residential structures increased at a very robust 15.8% annualized real rate. And investment in equipment and software increased at a more modest 3.8% annualized real rate. This non-residential investment is probably the key (along with consumer spending) on how weak the economy will be in 2008.
As I highlighted this morning, the non-residential investment news has turned negative in Q1 2008. Investment in non-residential structures was off 6.2% at an annualized rate, and investment in equipment and software investment declined 0.7%.

This is the normal historical pattern: residential investment leads non-residential investment, and all signs point to a sharp investment slump in 2008, especially in non-residential structures.

Investment in non-residential structures vs. Residential Investment This graph shows the YoY change in Residential Investment and investment in Non-residential Structures.

Note that residential investment (RI) is shifted 5 quarters into the future. The typical lag between RI and non-RI structures is 4 to 8 quarters.

Although the year-over-year change is still positive, this will probably turn negative in Q2 or Q3.

Since non-residential investment is highly correlated with recessions, this is a strong indicator that the U.S. economy is now in or near recession.