February 2011 NationalEconomicTrends Views expressed do not necessarily reflect official positions of the Federal Reserve System. T hree years ago an article 1 in this publication discussed the relationship between housing and the “R” word—“R” meaning recession, a term no one wanted to use (lest they jinx the economy) but nevertheless were thinking about. Now, after the worst recession since the Great Depression, we consider a different “R” word— recovery. The fact that many of the same concerns in the housing market remain raises this question: How important is housing in an economic recovery? Somewhat surprisingly, the housing component of GDP (more formally known as residential investment) tends to be a solid contributor to GDP growth during a recovery. Historically, residential investment has contributed only about 5 percent of GDP—a small share considering the consumption component is close to 70 percent. Nevertheless, smaller components such as residential investment do at times punch above their weight, which is evident when their effects are measured using growth rates rather than levels. That is, although residential investment is a small compo- nent of GDP in levels, it can contribute substantially to the GDP growth rate for short periods of time. The chart illustrates the relationship between residential investment and the business cycle over the past 35 years. It plots the rolling 4-quarter percentage contribution of residential investment to GDP growth. Over the period, residential investment contributed on average a meager 3 basis points to GDP growth. In contrast, excluding the recent recession, residential investment typically con- tributes at least 50 basis points to GDP growth within two years following a recession. This suggests that, although residential investment is not a major component of GDP growth on average, its growth typically helps during an economic recovery. However, a year and a half after the official end of the recent recession, residential invest- ment has yet to make a sizable contribution to GDP growth and is, in fact, presently making a negative contribution. To some degree this should be expected. The dramatic declines in housing prices during the recession created a glut of existing homes either already on or waiting to be put on the market once prices stabilize and start increasing. This “shadow inventory” of existing homes substantially dampens the need for new home construction. So does this mean we won’t see continued recovery in the coming year? Not necessarily. It does, however, suggest that the contribution from residential investment is likely to be smaller than normal, or that it may be delayed substan- tially. In any case, it should be kept in mind that residential investment is not the only expenditure component of GDP. As noted above, consumption is the largest component of GDP and, as such, is most likely to contribute significantly to GDP growth. However, such consumption-driven growth can also be hindered, at least indirectly, by residential invest- ment, through its effect on the employment of construction workers—a group with a current unemployment rate of over 20 percent and thus unlikely to be in a spending mood. —Michael W. McCracken 1 Thornton, Daniel L. “Housing and the ‘R’ Word.” Federal Reserve Bank of St. Louis National Economic Trends, February 2008; http://research.stlouisfed.org/publications/net/20080101/netpub.pdf. research.stlouisfed.org Housing’s Role in a Recovery –2.0 –1.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Real Residential Investment Percent Contribution Residential Investment Contributions to Percent Change in Real GDP, Rolling 4 Quarters NOTE: Gray bars indicate recessions determined by the National Bureau of Economic Research.
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Housing’s Role in a Recovery T...2011/02/01 · Housing’s Role in a Recovery –2.0 –1.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996
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Transcript
February 2011NationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
Three years ago an article1 in this publication discussed the relationship between housing and the“R” word—“R” meaning recession, a term no one
wanted to use (lest they jinx the economy) but neverthelesswere thinking about. Now, after the worst recession sincethe Great Depression, we consider a different “R” word—recovery. The fact that many of the same concerns in thehousing market remain raises this question: How importantis housing in an economic recovery?
Somewhat surprisingly, the housing component of GDP(more formally known as residential investment) tends tobe a solid contributor to GDP growth during a recovery.Historically, residential investment has contributed onlyabout 5 percent of GDP—a small share considering theconsumption component is close to 70 percent. Nevertheless,smaller components such as residential investment do attimes punch above their weight, which is evident when theireffects are measured using growth rates rather than levels.That is, although residential investment is a small compo-nent of GDP in levels, it can contribute substantially to theGDP growth rate for short periods of time.
The chart illustrates the relationship between residentialinvestment and the business cycle over the past35 years. It plots the rolling 4-quarter percentagecontribution of residential investment to GDPgrowth. Over the period, residential investmentcontributed on average a meager 3 basis pointsto GDP growth. In contrast, excluding the recentrecession, residential investment typically con-tributes at least 50 basis points to GDP growthwithin two years following a recession. Thissuggests that, although residential investmentis not a major component of GDP growth onaverage, its growth typically helps during aneconomic recovery.
However, a year and a half after the officialend of the recent recession, residential invest-ment has yet to make a sizable contribution toGDP growth and is, in fact, presently makinga negative contribution. To some degree thisshould be expected. The dramatic declines inhousing prices during the recession created aglut of existing homes either already on or
waiting to be put on the market once prices stabilize andstart increasing. This “shadow inventory” of existing homessubstantially dampens the need for new home construction.
So does this mean we won’t see continued recovery inthe coming year? Not necessarily. It does, however, suggestthat the contribution from residential investment is likely tobe smaller than normal, or that it may be delayed substan-tially. In any case, it should be kept in mind that residentialinvestment is not the only expenditure component of GDP.As noted above, consumption is the largest component ofGDP and, as such, is most likely to contribute significantlyto GDP growth. However, such consumption-driven growthcan also be hindered, at least indirectly, by residential invest-ment, through its effect on the employment of constructionworkers—a group with a current unemployment rate ofover 20 percent and thus unlikely to be in a spending mood.
—Michael W. McCracken
1 Thornton, Daniel L. “Housing and the ‘R’ Word.” Federal Reserve Bank ofSt. Louis National Economic Trends, February 2008;http://research.stlouisfed.org/publications/net/20080101/netpub.pdf.
Residential Investment Contributions to Percent Change in Real GDP, Rolling 4 Quarters
NOTE: Gray bars indicate recessions determined by the National Bureau of Economic Research.
Contents
Page
3 Economy at a Glance
4 Output and Growth
7 Interest Rates
8 Inflation and Prices
10 Labor Markets
12 Consumer Spending
14 Investment Spending
16 Government Revenues, Spending, and Debt
18 International Trade
20 Productivity and Profits
22 FOMC Economic Projections
24 Quick Reference Tables
29 Notes and Sources
Conventions used in this publication:
1. Shaded areas indicate recessions, as determined by the National Bureau of Economic Research.
2. Percent change refers to simple percent changes. Percent change from year ago refers to the percent change from thesame month or quarter during the previous year. Compounded annual rate of change shows what the growth rate wouldbe over an entire year if the same simple percent change continued for four quarters or twelve months. The compoundedannual rate of change of x between the previous quarter t –1 and the current quarter t is: [(xt /xt – 1)4–1] × 100.For monthly data replace 4 with 12.
3. All data with significant seasonal patterns are adjusted accordingly, unless labeled NSA.
We welcome your comments addressed to:
Editor, National Economic TrendsResearch DivisionFederal Reserve Bank of St. LouisP.O. Box 442St. Louis, MO 63166-0442
National Economic Trends is published by the Research Division of the Federal Reserve Bank of St. Louis. Visit the Research Division’s website at research.stlouisfed.org/publications/net todownload the current version of this publication or register for e-mail notification updates. For more information on data in this publication, please visit research.stlouisfed.org/fred2 or call(314) 444-8573.
National Economic Trendsupdated through02/15/11
3Research DivisionFederal Reserve Bank of St. Louis
investment and include consumption of government capital, while unified budgetoutlays do the reverse; (3) NIPA accounts exclude Puerto Rico and U.S. terri-tories; and (4) various timing issues are handled differently. Outlays andReceipts are from the NIPAs, except as noted. Since 1977, the federal FiscalYear starts on October 1. Excluded agency debt was 0.6 percent of federaldebt at the end of fiscal 1997. Federal Debt Held by the Public includesholdings of the Federal Reserve System and excludes holdings of the socialsecurity and other federal trust funds. Federal grants in aid to state and localgovernments appear in both state and local receipts and federal outlays.
Pages 18, 19: The Trade Balance (shown on a balance of payments basis) isthe difference between exports and imports of goods (merchandise) and services.It is nearly identical in concept to the Net Exports component of GDP, but dif-fers slightly in accounting details. The Investment Income Balance equalsincome received from U.S.-owned assets in other countries minus incomepaid on foreign-owned assets in the U.S. The investment income balance isnearly identical in concept to the difference between gross national productand gross domestic product, but differs in accounting details. The CurrentAccount Balance is the trade balance plus the balance on investment incomeplus net unilateral transfers to the U.S. from other countries.
Pages 20, 21: Output per Hour (Y/H), Unit Labor Cost (C/Y), andCompensation per Hour (C/H) are indexes which approximately obey thefollowing relationship: %(Y/H) + %(C/Y) = %(C/H) with %() meaning percentchanges. Unit labor cost is shown on page 9. Real Compensation per Houruses the CPI to adjust for the effects of inflation. Nonfarm business accountedfor about 77 percent of the value of GDP in 2000, while nonfinancial corpora-tions accounted for about 54 percent. Inventory Valuation Adjustments (IVA)remove the effect of changes in the value of existing inventories from corpo-rate profits and proprietors’ income. (This change in value does not correspondto current production and therefore is not part of GDP). Capital ConsumptionAdjustments (CCAdj) increase profits and proprietors’ income by the differ-ence between estimates of economic depreciation and depreciation allowedby the tax code. Components of national income not shown are rental incomeof persons and net interest.
Pages 22, 23: The economic projections of the Federal Open MarketCommittee (FOMC) are published four times a year. Except for the unemploy-ment rate, the projections for the current and following years are on a Q4/Q4horizon. The shaded area represents the range of the economic projections ofthe FOMC members, and the dot signifies the mid-point of the ranges. Theprojections of the changes in the total PCE price index and the core PCE priceindex (excluding food and energy prices) are presumed to converge over time.
SourcesBureau of Economic Analysis (BEA), U.S. Dept. of Commerce
National income and product accounts, international trade and investmentdata (except by country), auto and light truck sales.
Census Bureau, U.S. Dept. of CommerceInventory-sales ratios, retail sales, capital goods orders, housing starts,exports and imports by country.
Bureau of Labor Statistics (BLS), U.S. Dept. of LaborAll employment-related data, employment cost index, consumer andproducer price indexes, unit labor cost, output per hour, compensationper hour, multifactor productivity.
United States Department of TreasuryUnified budget receipts, outlays, deficit, debt.
Federal Reserve BoardIndex of industrial production, treasury yields, exchange rates, capacityutilization, household debt.
The Survey Research Center, The University of MichiganConsumer sentiment index.
Organization for Economic Cooperation and Development (OECD)GDP for major trading partners (not available on FRED).
NotesPages 4, 5: Final Sales is gross domestic product (GDP) minus change inprivate inventories. Advance, Second, and Third GDP Growth Rates arereleased during the first, second, and third months of the following quarter.Changes result from incorporation of more complete information. Real GDPis measured in 2005 dollars. The ISM (formerly Purchasing Managers’) Indexis a weighted average of diffusion indexes for new orders, production, supplierdeliveries, inventories, and employment. Aggregate and Average WeeklyHours are paid hours of production and nonsupervisory employees. TheInventory-Sales Ratio uses nominal (current-dollar) inventory and sales data.
Page 6: For information on how to calculate the Contribution of a componentto the overall GDP growth rate, see the October 1999 issue of the Survey ofCurrent Business, p. 16. The sign is changed for Imports.
Page 7: Ten-year Treasury Yields are adjusted to constant maturity; three-month yields are secondary market averages. All rates used in the yield curvesare adjusted to constant maturity. Standard and Poor’s 500 Index withReinvested Dividends shows the total return: capital gains plus dividends.
Pages 8, 9: Oil (West Texas intermediate) and Natural Gas (Henry Hub) spotand futures prices are listed in the Wall Street Journal. Spot prices are monthlyaverages of daily prices; futures prices are usually taken from the last tradingday of the month. Consumer Price Index is for all urban consumers. TheConsumption Chain Price Index is the index associated with the personalconsumption expenditures component of GDP. The Employment Cost Index(ECI) covers private nonfarm employers. ECI Compensation refers to a fixedsample of jobs, while Compensation per Hour covers all workers in thenonfarm business sector in a given quarter. In both cases, compensation iswages and salaries plus benefits.
Pages 10, 11: Effective with the January 2008 Employment Situation, theestablishment survey data for employment, hours, and earnings have beenconverted from the 2002 NAICS system to the 2007 NAICS system. For moreinformation see http://www.bls.gov/ces/. Nonfarm Payroll Employment iscounted in a survey of about 400,000 establishments (Current EmploymentStatistics). It excludes self-employed individuals and workers in private house-holds, but double-counts individuals with more than one job. The HouseholdSurvey (Current Population Survey) of about 60,000 households providesestimates of civilian employment, unemployment rate, labor force participationrate, and employment-population ratio. Population is civilian, noninstitutional,16 years and over. The 90 percent confidence intervals for the unemploymentrate (± 0.2 percentage points) and change in household survey employment(± 430,000) measure uncertainty due to sample size. Because the householdsurvey was changed in January 1994, data prior to this date are not strictlycomparable. The Bureau of Labor Statistics announced several revisions tothe Household Survey on Feb. 7, 2003, with the release of the January 2003data. For more information, see <www.bls.gov/cps/>. The Job Openings rateis the number of job openings on the last business day of the month as apercent of total employment plus job openings.
Page 13: The Michigan Consumer Sentiment Index shows changes in asummary measure of consumers’ answers to five questions about their currentand expected financial situation, expectations about future economic conditions,and attitudes about making large purchases. The survey is based on a representa-tive sample of U.S. households.
Page 15: Gross Private Saving is the sum of personal saving, undistributedcorporate profits with IVA and CCAdj (see notes for pp. 18-19), and privatewage accruals less disbursements. Gross Government Saving is net govern-ment saving (surplus/deficit) plus consumption of fixed capital. Balance onCurrent Account (NIPA) is net capital transfer payments to the rest of theworld plus net lending or net borrowing (international trade and income flows).
Pages 16, 17: Government Consumption and Investment is current expendi-tures on goods and services, including capital consumption (depreciation) andgross investment, as reported in the NIPAs. The Unified Federal BudgetSurplus/Deficit differs from NIPA Basis in four main ways: (1) NIPA excludestransactions involving existing assets; (2) NIPA outlays exclude government
National Economic Trends
Research DivisionFederal Reserve Bank of St. Louis 29