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Monday, March 29, 2010

Residential Investment Stalled

by Calculated Risk on 3/29/2010 01:37:00 PM

The BEA released an update to the underlying detail tables for Q4 today. The following graph uses the updated data for Residential Investment through Q4, and an estimate for Q1 based on housing data through February (a 10% annualized decline in residential investment).

Note: Residential Investment includes new single family structures, new multi-family structures, home improvement, brokers' commissions on sale of structures and a few minor categories.

Residential Investment as Percent of GDPClick on graph for large image.

This graph shows total Residential Investment, and single-family structures, both as a percent of GDP.

Residential investment (RI) is one of the best leading indicators for the economy. Usually RI as percent of GDP is declining before a recession, and climbs sharply coming out of a recession.

Note: The 2001 recession was a business led recession. Some readers will notice the sharp decline in 1966 and wonder why the economy didn't slide into a recession - the answer is the rapid build-up for the Vietnam war kept the economy out of recession (not the best antidote).

But this time RI is moving sideways. This time is different.

The reason RI is moving sideways is because of the huge overhang of existing housing units (both single family and rental units). And this is one of the key reasons I think the current recovery will be sluggish and choppy - and that unemployment will stay elevated for some time.

Stated simply: One of the usual engines of recovery - residential investment - isn't contributing this time.