by Calculated Risk on 4/29/2009 11:41:00 AM

Although Q1 GDP was very negative due to the sharp investment slump (this was expected, see: Q1 GDP will be Ugly), the decline in Q1 was weighted towards lagging sectors.

Click on graph for larger image in new window.

This table shows the contribution to GDP for several sectors in Q1 2009 compared to Q4 2008.

The leading sectors are on the left, the lagging sectors towards the right.

There has been a shift from leading sectors to lagging sectors, although the negative contribution from residential investment was larger in Q1 than in Q4 2008.

However it appears that the slump in residential investment (mostly new home construction and home improvement) is slowing, and I expect the contribution to Q2 2009 to be close to zero - after declining for 13 consecutive quarters.

This doesn't mean the downturn is over, but this does suggest that the worst of the GDP declines is probably over.

For more, see Business Cycle: Temporal Order. Here is a repeat of the table showing a simplified typical temporal order for emerging from a recession:

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

Note: Any recovery will probably be sluggish, because household balance sheets still need repair (more savings), and any rebound in residential investment will probably be small because of the huge overhang of existing inventory. As I noted in Temporal Order, at least we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

by Calculated Risk on 4/29/2009 09:13:00 AM

The huge investment slump was the key story in Q1.

Click on graph for larger image in new window.

Residential investment (RI) has been declining for 13 consecutive quarters, and Q1 2009 was the worst quarter (in percentage terms) of the entire bust. Residential investment declined at a 38% annual rate in Q1.

This puts RI as a percent of GDP at 2.7%, by far the lowest level since WWII.

The second graph shows non-residential investment as a percent of GDP. All areas of investment are now cliff diving.

Business investment in equipment and software was off 33.8% (annualized), and investment in non-residential structures was off 44.2% (annualized).

The third graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures. The graph shows the rolling 4 quarters for each investment category.

This is important to follow because residential tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

Residential investment (red) has been a huge drag on the economy for the last couple of years. The good news is the drag on GDP will probably be getting smaller going forward.

Even if there is no rebound in residential investment later this year, the drag will be less because there isn't much residential investment left! The bad news is any rebound in residential investment will probably be small because of the huge overhang of existing inventory.

As expected, nonresidential investment - both structures (blue), and equipment and software (green) - fell off a cliff. In previous downturns the economy recovered long before nonresidential investment in structures recovered - and that will probably be true again this time.

As always, residential investment is the most important investment area to follow - it is the best predictor of future economic activity.

by Calculated Risk on 4/29/2009 08:32:00 AM

From the BEA: Gross Domestic Product: First Quarter 2009 (Advance)

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.1 percent in the first quarter of 2009 ...

Real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth. ...

Real nonresidential fixed investment decreased 37.9 percent in the first quarter ...

Nonresidential structures decreased 44.2 percent ...

Equipment and software decreased 33.8 percent ...

Real residential fixed investment decreased 38.0 percent ...

So PCE increased (as expected), but investment slumped sharply in all categories.

From Rex Nutting at MarketWatch: GDP falls 6.1% on record drop in investment

The two-quarter contraction is the worst in more than 60 years. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace ...

For the stress tests, the baseline scenario for Q1 was minus 5.0%, and the more adverse scenario was minus 6.9%, so, before revisions, Q1 is between the two scenarios. More to come ...

by Calculated Risk on 4/28/2009 11:49:00 PM

By popular request ... the futures are up slightly ahead of the GDP report. Asian markets are mostly up (Nikkei is off over 2%).

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

Best to all.

by Calculated Risk on 4/28/2009 09:23:00 PM

From the Financial Times: Commercial mortgages at risk

“Commercial real estate is in a world of hurt and will be for at least the next two years,” said Ross Smotrich, analyst at Barclays Capital. “This is a capital intensive business in which lending capacity has diminished because of the absence of securitisation, while the fundamentals are driven by the overall economy so both occupancy and rents are declining.”

... At the end of the first quarter, defaults and payments more than 60 days late were at 1.53 per cent of outstanding mortgages. Fitch said they could reach 4 per cent by the end of 2010.

Rising vacancy rates and falling rents ... not the best fundamentals. The story is the same for retail, multi-family, industrial, and hotels. CRE: A world of hurt.