The 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.
Residential investment (RI) decreased at a 6.2% annual rate in Q3. Equipment investment decreased at a 2.7% annual rate, and investment in non-residential structures increased at a 5.4% annual rate.
On a 3 quarter trailing average basis, RI (red) is unchanged, equipment (green) is slightly negative, and nonresidential structures (blue) is slightly positive.
I’ll post more on the components of non-residential investment once the supplemental data is released.
I expect investment to pick up going forward, and for the economy to grow at a steady pace.
Residential Investment as a percent of GDP has generally been increasing, but is only just above the bottom of the previous recessions – and I expect RI to continue to increase for the next few years.
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.
The third graph shows non-residential investment in structures, equipment and “intellectual property products”. Investment in equipment – as a percent of GDP – has declined a little recently.. Investment in nonresidential structures – as a percent of GDP – had been moving down due to less investment in energy and power, and is now moving sideways.
Still no worries – residential investment will pickup (still very low), and non-residential will also pickup.