Tag Archives: GDP

JCHS: Sizing Housing’s Role in the Economy Before and After Recessions

Sizing Housing’s Role in the Economy Before and After Recessions

by Dan McCue
Research Manager
The most direct measure of housing’s impact on the economy is Residential Fixed Investment (RFI). RFI includes spending on construction of new housing units and manufactured homes, as well as improvements spending, brokers’ commissions on the sale of residential property, spending on some types of built-in equipment (such as heating and air conditioning equipment), and also net purchases of residential units from the government.
In any single period of time, RFI is a modest part of the total output of the US economy as measured by gross domestic product (GDP). According to the US Bureau of Economic Analysis’s National Income and Product Account (NIPA) tables, which provide quarterly GDP data for most series dating back to 1947, RFI has on average represented just 4.2% of the economy. In terms of economic growth, however, growth in RFI can have influence that far exceeds its share of the economy (Figure 1). This is particularly the case in the time periods around recessions, when decline or growth in RFI can account for 15 or even 20 percent of overall decline or growth in GDP – enough to push the economy into or out of a recession (seeLeamer (2007) “Housing IS the Business Cycle“). Prior to the Great Recession of 2007-9, for example, the preceding downturn in RFI alone shaved fully 1 percentage point off of GDP.
 1219_mccue_figure1
Note: Shaded areas are recessions.

Source: JCHS tabulations of BEA and NBER Business Cycle data.In the five recessions that occurred prior to the Great Recession between 1970 and 2001, housing construction was both a drag on the economy leading into the recessions and a buoy immediately afterwards (Figure 2). In the four quarters leading into each of these recessions, RFI’s contribution to GDP growth was normally negative, ranging from a mild -0.1 percentage point prior to the 2001 recession up to a half a percentage point drag on GDP prior to the 1980 double-dip recession. Following these recessions, RFI’s influence not only returned positive, but its positive contribution to GDP growth generally skyrocketed to several multiples above normal. The average percentage point contribution of RFI to GDP growth ranged from 0.3 to 1.1 percentage points in the first year after each of the past five recessions. Such growth in RFI during those periods equated to about one-fifth of all GDP growth at the time – a nice boost to the economy.

RFI’s positive contribution to GDP following the Great Recession has been nowhere near those seen after past recessions. As shown in figure 2, while RFI’s drag on GDP heading into the Great Recession exceeded that heading into any recession since 1970, RFI provided just 0.1 of a percentage point to GDP in the first four quarters after the recession, and was still providing negligible impact fully nine quarters after the recession officially ended. However, the third quarter of 2012 marks 13 quarters after the Great Recession, and RFI’s impact to GDP over the past year has been consistently positive on the order of 0.3 percentage points, or about 12 percent of current GDP growth. With housing construction starts rising, the positive economic contributions of RFI will follow.

1219_mccue_figure2

Leave a comment

Filed under JCHS

Architecture Billings Index says Q3 GDP should be muted

Architecture Billings Index says Q3 GDP should be muted

Tom McClellan
Editor, The McClellan Market Report

Chart In Focus

The preliminary report of 3rd quarter GDP for the U.S. is due out on Friday, Oct. 26, and so far the consensus expectation is for a rise of 1.9%.  But my analysis of the data from the American Institute of Architects shows that the Q3 number could be even lower than that.

What the AIA does is to survey its member firms to see what they have to say about both actual billings from current customers and inquiries about potential new projects.  The two pieces of data are reported each month by the AIA, and I have found that they give good information about what the GDP numbers are likely to do.

This week’s chart compares a 6-month simple moving average of the “inquiries” data (as opposed to the actual billings which the AIA also tracks).  It makes a pretty good model for what overall GDP will do.  The implication is that Q3 should see a drop in growth rate versus Q2, but still positive.

The ABI data and GDP data are concurrent in real time (i.e. no leading indication), but in reporting time there is a lag due to the delay in getting out the GDP data.  So by watching what the monthly reports of the ABI data have been saying, we can get a really good idea of what the GDP numbers will be.  We have to keep in mind, though, that what the statisticians report for the preliminary GDP number may differ quite a bit from the later final numbers, and indeed they may differ from real life.  But for anyone who finds it useful to watch the reports on GDP, this ABI data can be a useful way to model that data.

Interestingly, we are also just hearing bullish reports out of some of the big nationwide homebuilding companies.  But we should all filter that bullishness through an examination of what the ABI data have to tell us about home sales.

This next chart looks at the raw monthly ABI Inquiries data versus home sales as reported by the Census Department.

ABI Inquiries vs New Home Sales

The Inquiries data saw a spike peak in February 2012, but has remained pretty tepid since then.  So the Architecture Billings Index data is not yet saying that a big spike up in new home sales is looming anytime soon.  It is worth noticing in this chart that the most recent readings on new home sales are still not even back up to the incentive-fueled levels seen in 2009 and early 2010.  So to paraphrase what Mark Twain once said about his own death, rumors of a huge housing recovery may have been greatly exaggerated.

For more information or would like to subscribe to the Architecture Billings Index dataset, please contact James Chu, Director of Market Research at the American Institute of Architects,jchu@aia.org or (202) 626-8045.

Leave a comment

Filed under Architects, Economy