Friday, October 26, 2018

Q3 GDP: Investment

by Bill McBride on 10/26/2018 10:21:00 AM

The first 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.

Investment ContributionsClick on graph for larger image.

Residential investment (RI) decreased in Q3 (-4.0% annual rate in Q3).  Equipment investment increased slightly at a 0.4% annual rate, and investment in non-residential structures decreased at a 7.9% annual rate.

On a 3 quarter trailing average basis, RI (red) is down slightly, equipment (green) is positive, and nonresidential structures (blue) is also up.

Recently RI has been soft, but the decrease is fairly small.

I'll post more on the components of non-residential investment once the supplemental data is released.

Residential InvestmentThe second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP decreased in Q3, however RI has generally been increasing.  RI as a percent of GDP is only just above the bottom of the previous recessions - and I expect RI to continue to increase further in this cycle.

The increase is now primarily coming from single family investment and home remodeling.

I'll break down Residential Investment into components after the GDP details are released.

Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

non-Residential InvestmentThe third graph shows non-residential investment in structures, equipment and "intellectual property products".  Investment in equipment and  non-residential structures - as a percent of GDP - declined.