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Bill McBride on private domestic investment

Bill McBride offers:

A little holiday cheer …

Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but the key is to watch private domestic investment, especially residential investment. Even though private investment usually only accounts for around 15% of GDP, the swings for private investment are significantly larger than for PCE during the business cycle, so private investment has an outsized impact on GDP at transitions in the business cycle.

The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph).

GDP has fairly small annualized changes compared to the huge swings in investment, especially during and just following a recession. This is why investment is one of the keys to the business cycle. (Worth a visit to view the graphs)

The key downside risk for the US economy in 2013 is too much austerity, too quickly. However, barring a policy mistake (I expect a fiscal agreement), it seems unlikely there will be a sharp decline in private investment in 2013. This is because residential investment is already near record lows as a percent of GDP and will probably increase further in 2013, and that suggests the US will avoid a new recession in 2013.
Read more at Calculated Risk

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Jobs reporting…gained and lost confusions

I noticed in comments on Spencer England’s post for this month’s Employment Situation that the 1.2 million jobs lost number was put forth as fact and a reason to dismiss BLS numbers outright. Links to a more careful and complete look at the numbers follows:

Brad Plummer at the WaPo discusses two issues with employment and seasonal factors: Wait, the U.S. economy actually lost 1.2 million jobs in July?

Bill McBride at Calculated Risk adds his own analysis and charts in this post…Payroll Employment and Seasonal Factors

Take the time to note limits as well as information gained in this very general number used for many different reasons….there is also a lot of data available to see trends within the aggregated number.

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Housing equity withdrawal drove the bubble, not so much the building

Tim Duy also points to Bill McBride and Josh Lerner adding to the discussion of the narrative of housing in our economy and how that should affect policy.  I would add of course the variety of responses by the mortgage industries (see Naked Capitalism) since that started in earnest round 1998 (MERS).  I think this idea can be further refined and tied to other aspects of our troubles globally.

What Are We Expecting From Housing?, by Tim Duy: Josh Lehner and Bill McBride note that the manufacturing slowdown does not necessarily indicate recession, something I noted as well. Another version of that story is seen by comparing the ISM headline number with the new orders data:
 …During the 2002-2005 period, arguably the height of the housing bubble, residential construction contributed an average of 0.4 percentage points to GDP growth each quarter. In the first quarter of this year, the contribution was 0.42 percentage points. So, barring the occasional pop in the data, housing is already contributing to GDP growth about what we would expect.
 …Certainly we can envision accelerated home building triggering an increase in both manufacturing (capital equipment) and consumer (job/income growth) activity as well; these tend to be interconnected activities. So maybe the overall impact is a bit higher.


So here is the question: What was more important in holding the economy close to potential output, residential construction itself, or the housing price bubble? I tend to believe the price-driven balance sheet effects were driving dynamics over this past business cycle. Absent a healing of household balance sheets (or, relatedly, monetary policy that supported such healing via somewhat higher inflation expectations to reduce debt in real terms), I would expect overall growth to remain subdued, despite a rebound in residential construction. The latter is helpful and important, but not by itself a magic bullet.

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