8:48 AM » Investment Contributions to GDP: Leading and Lagging Sectors
By request, the following graph is an update to: The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. 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. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue. Click on graph for larger image in new window. Residential Investment (RI) made a positive contribution to GDP in the Q2 2010, but RI will be a drag on GDP again in Q3. RI was positively impacted in Q2 by the housing tax credit in two ways: first, builders rushed to complete homes by the end of June, and, second, real estate agent commissions were boosted in Q2 and will decline sharply in Q3 (just look at existing home sales in July). The rolling four quarter change for RI just turned positive, but will turn negative again in Q3. Equipment and software investment has made a significant positive contribution to GDP for four straight quarters (it is coincident). The contribution from nonresidential investment in structures was flat in Q2 - only because of a surge of investment for petroleum and natural gas - while investment in hotels, malls and office buildings continued to decline. As usual nonresidential investment in structures is the last sector to recover. The key leading sector - residential investment - has lagged the recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.