Housing’s Other Contribution to GDP

Housing added 0.7 percentage points to real GDP growth in the first quarter of 2014, however the construction component (residential fixed investment) detracted from growth over the past two quarters owing to the poor weather conditions seen across the country over the period. In addition, housing accounted for 15.6 percent of total real GDP, which is low from a historical perspective.

 
The price component of GDP is becoming more interesting, however. Starting in 2012, housing has been contributing more to prices, for the most part, as seen in the figure below. In the first quarter of this year, it added over 0.7 percentage points to growth in the GDP price index, led by nearly 0.5 percentage points in the construction component (the most since the third quarter of 2008); the overall price index rose 1.3 percent. This is partly due to increased construction costs and higher rental prices.

Currently, overall inflation remains subdued and is within the Federal Reserve’s comfort zone. But moving forward, if housing becomes an even larger share of GDP, it would likely place upward pressure on inflation measures in general.

 

GDP Growth, First Quarter, Third Estimate – Let’s Move On

The Bureau of Economic Analysis (BEA) released the third estimate of real GDP growth for the first quarter of 2014. Real GDP contracted at a 2.9% seasonally adjusted annual rate, down from +0.1% growth in the first (advance) estimate, and -1.0% in the second estimate.

The downward revision to the third estimate was concentrated in personal consumption expenditures (PCE) and trade. PCE grew at a 1.0% annual rate rather than the 3.1% in the second estimate, shaving 1.4 percentage points from growth. Exports contracted faster and imports expanded faster than previously estimated, reducing growth by an additional 0.5 percentage points in the third estimate.

Early indications are that the second quarter numbers will be much stronger. Let’s move on.

 

GDP Growth and Inventory Investment – Payback Time

The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the first quarter of 2014. The second estimate is based on more complete data than is available for the advance estimate. Real GDP contracted at a 1.0% seasonally adjusted annual rate, a sharper slowdown than originally estimated (initially +0.1% growth). Growth in the fourth quarter was 2.6%.

The downward revision was almost entirely concentrated in private inventory investment, shaving 1.62 percentage points from GDP growth, down from 0.57 points in the initial estimate. The other major components of GDP were largely unchanged.

The payback from inventory investment has been looming since surging in the second half of last year. The hit to growth this quarter sets the stage for more stable growth going forward.

We expect growth to strengthen through the rest of the year as well as into 2015. With the correction to inventory investment out of the way and the harsh winter behind us second quarter growth should rebound and provide a much better read on the economy’s underlying strength.

 

GDP Growth and the Fed’s Perspective – Riding the Storm Out

The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the first quarter of 2014. Real GDP grew at a 0.1% seasonally adjusted annual rate, a sharper slowdown from the 2.6% growth in the fourth quarter than we expected. The slowdown was broad based, with every major category subtracting from growth except personal consumption expenditures (PCE). PCE grew at a respectable 3.0% seasonally adjusted annual rate, but was still slower than the 3.3% rate last quarter.

The biggest drags on growth were from exports and investment. The slowdown in investment was expected based on an anticipated pullback in inventory investment, but severe winter weather was a surprise that constrained fixed investment in equipment and homebuilding.

The good news is that the drag from investment will turn into a positive as fixed investment rebounds from the bad weather, particularly homebuilding, and the effects of inventory rebalancing wane. We expect growth to bounce back in the second quarter and gain strength through the rest of the year.

This view of optimism going forward is shared by the Federal Reserve’s monetary policy arm, the Federal Open Market Committee (FOMC). In the statement released today following their two day meeting the committee characterized growth in economic activity as having picked up since the March meeting, following the adverse weather conditions.

But beyond the language of the statement, a more significant indicator of the FOMC’s confidence that the economy will strengthen was the decision to continue on course with the reduction to the Fed’s asset purchasing program. By announcing a further $10 billion reduction in monthly asset purchases the committee is signaling its belief that the economic recovery is proceeding consistent with their expectations based on the underlying strength of the fundamentals and that the weakness in first quarter growth was due to temporary factors.

GDP Growth in the Fourth Quarter – Revised Down

The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the fourth quarter of 2013. Real GDP growth was revised down to a 2.4% seasonally adjusted annual rate, from 3.2% in the advance estimate. The second estimate is based on more complete data than was available for the advance estimate. Real GDP grew at an annual rate of 4.1% in the third quarter.

The revisions were primarily reductions in the pace of personal consumption expenditures (PCE) and net exports (less exports, more imports), as well as a smaller contribution to growth from inventory investment. PCE grew at an annual pace of 2.6%, rather than 3.3%, exports 9.4% rather than 11.4%, imports 1.5% rather than 0.9%, and inventory investment contributed 0.14 percentage points to growth, rather than 0.42 in the advance estimate.

There’s not much to love in today’s report. A strengthening of fixed nonresidential investment is small compensation for the slowdown in PCE and the inventory investment pullback lurking in the shadows. This could set the stage for a softer first half of 2014 than we anticipated, but we still believe economic growth will strengthen as the year unfolds and continue into 2015.

 

Housing Share of the Economy at 15.3%

Housing is an important source of economic growth. As of the final quarter of 2013, housing’s share of gross domestic product (GDP) was 15.3%, with home building yielding 3.1 percentage points of that total.

Housing-related activities contribute to GDP in two basic ways.

The first is through residential fixed investment (RFI). RFI is effectively the measure of the home building and remodeling contribution to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes and brokers’ fees. For the fourth quarter, RFI was 3.1% of the economy.

While the final quarter of 2013 was effectively tied with the second quarter of the year for the strongest level of RFI after the Great Recession ($487 billion annualized pace), the drop from the noticably strong third quarter pace ($500 billion annualized) resulted in home building yielding a negative impact on the fourth quarter headline GDP result of 3.2% growth.  This was the first negative contribution since the first quarter of 2011. Nonetheless, the trend in recent quarters indicates that RFI is growing faster than the economy as a whole. For example, over the last two years, GDP has grown about 4.7%, while RFI is up 22.8%.

The second impact of housing on GDP is the measure of housing services, which includes gross rents (including utilities) paid by renters, and owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units) and utility payments. The inclusion of owners’ imputed rent is necessary from a national income accounting approach because without this measure increases in homeownership would result in declines for GDP. For the fourth quarter, housing services was 12.3% of the economy.

Historically, RFI has averaged roughly 5% of GDP while housing services have averaged between 12% and 13%, for a combined 17% to 18% of GDP. These shares tend to vary over the business cycle.

GDP Growth in the Fourth Quarter – What Goes Up …

The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the fourth quarter of 2013. Real GDP grew at a seasonally adjusted annual rate of 3.2%. This is a slowdown from the annual rate of 4.1% in the third quarter.

The slowdown in the fourth quarter puts GDP growth on a more realistic path, but the deceleration isn’t over yet. Both the third and fourth quarters have been inflated by inventory investment. This “restocking of shelves” rather than fixed investment (i.e., expanding a productive capital stock) contributed 1.7 percentage points to growth in the third quarter and 0.4 points in the fourth quarter. We expect the inevitable slowdown in inventory investment to subtract 1.0 percent from growth in the first quarter of 2014 with more modest reductions following.

Overall, the report is mixed. The inventory cycle will turn against growth in the near term but personal consumption expenditures accelerated in the fourth quarter and the slowdown in fixed investment will be reversed as residential construction ramps up going forward. We expect GDP growth to slow in the first quarter of 2014 but to improve steadily through the rest of the year and continue into 2015.

 

GDP Growth in the Third Quarter, Third Estimate – Growth That Matters

The Bureau of Economic Analysis (BEA) released the third estimate of real GDP growth for the third quarter of 2013. Real GDP growth was revised upward to a seasonally adjusted annual rate of 4.1%, from the second estimate of 3.6%. Real GDP grew at annual rate of 2.5% in the second quarter and 1.1% in the first quarter.

The first (or advance) estimate of real GDP growth was 2.8% and the second estimate was revised up to 3.6%, but that higher growth was somewhat misleading because it was heavily (almost exclusively) concentrated in inventory investment. That’s bad because it’s not just a one-time thing, in this case it’s likely to reversed in subsequent quarters because the push up was unsustainably large. The upward revision from 3.6% to 4.1% in today’s report is good news because it’s the right kind of growth: growth in personal consumption expenditures (PCE) and business fixed investment (not inventory investment).

The upward revision to PCE growth (from 1.4% to 2.0%) is particularly good because it changes the recent pattern from declining consumption (typically two thirds of GDP) over the year, to a more encouraging rebound from a soft second quarter.

Nonresidential fixed investment growth was revised upward from 3.5% to 4.8%. These revisions shift more GDP growth toward consumption and investment (sustainable growth) and away from inventory investment (shelf restocking).

There will still be some payback (subtraction from growth) in subsequent quarters as inventory investment slows to more normal levels, but stronger growth in consumption and fixed investment will ease the blow.

GDP Growth in the Third Quarter, Second Estimate – Inventory Investment, Blessing or Curse?

The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the third quarter of 2013. Real GDP growth was revised upward to a seasonally adjusted annual rate of 3.6%, from the advance estimate of 2.8%. Real GDP grew at annual rate of 2.5% in the second quarter and 1.1% in the first quarter.

The downside in last month’s advance estimate of GDP growth was that despite accelerating from 2.5% to 2.8% between the second and third quarters, overall growth was heavily reliant on inventory investment (0.8 of the 2.8 percentage points), and growth in personal consumption expenditures (PCE), typically 65%-70% of GDP, slowed.

Today’s upward revision provided more of the same. The 0.8 percentage point improvement in GDP growth (from 2.8% to 3.6%) was more than accounted for by the upward revision to inventory investment, bringing its contribution to 1.7 percentage points of the 3.6% growth. And the growth in PCE, was revised down to an annual rate of 1.4% from 1.5%.

We expect GDP growth to slow sharply in the fourth quarter with an inventory investment payback shaving 1.5 percentage points from growth, and possibly another 0.5 percentage points from growth in the first quarter of 2014.

 

GDP Growth in the Second Quarter, Third Estimate – Unchanged

The Bureau of Economic Analysis (BEA) released the third estimate of real GDP growth for the second quarter of 2013. Real GDP grew at a seasonally adjusted annual rate of 2.5%, unchanged from the second estimate last month. Downward revisions to inventory investment and exports were offset by upward revisions to state and local government spending. Real GDP growth in the first quarter was 1.1%.

Third quarter (July-September) economic activity has largely taken place and will be reported (the advance estimate) in late October. The real wildcard for economic growth going forward will be how the upcoming fiscal year budget and debt ceiling battles are resolved. The impact of any October showdown(s) will be reflected in the fourth quarter data released for the first time in late January.

With no agreement and high (or low) drama on Capitol Hill at this late date, an elegant long-term solution seems unlikely. However, we expect cooler heads to prevail and an economy-crushing meltdown to be avoided. Keep your fingers crossed.