Residential investment, GDP, and economic recoveries

For those of you who come to this blog looking for something other than economic news, hang in there! There has been a lot of interesting and very important news generated by the economy in recent days — and there could be a whole lot more over the next few weeks.

But there will be plenty of other interesting things going on over the next few weeks in Savannah, including some great shows and festivals. I’m sure I’ll be posting about some of that.

Today, Boston Federal Reserve President Eric Rosengren gave a talk entitled Housing and Economic Recovery. Click that link if you want a clear and detailed discussion of the role that residential investment typically plays in economic recoveries.

I’ll just include one chart here from Rosengren’s talk, but there are others that are worth a look.

Here it is:
So Rosengren has averaged the percent change in certain key economic sectors in the first two years of the three most recent recoveries (1982-84, 1991-93, 2001-3)  from recession. Typically, residential fixed investment (primarily residential construction but including renovation) jumps more than 30% in the first two years after a recession. But we’ve seen residential investment decline this time. Typically, government spending also increases over two years by almost 5%, but that has declined this time too.  Declines in those two sectors are certainly related to the sluggish increase in consumption over the last couple of years compared to previous recession.

Throw in the sheer depth of the 2007 to 2009 recession, and you’ve got a straightforward framework for understanding the current economic sluggishness and the very real risk of a new recession, which I wrote about earlier today, or just another phase of a larger period of contraction, if you prefer to think of it that way.