How far from full recovery are we, Part II: Housing to the rescue?
I noted a while back that the uptick in residential construction was a genuine bright spot in the economy, and one that would all else equal make one expect better GDP growth in 2013 than 2012. But just how much should we realistically expect from residential investment in driving growth?
Not much. Residential investment is only about 2.7 percent of the overall economy (as of the first quarter of 2013), so even extraordinarily fast growth in this sector would not be enough to drag the rest of the economy with it. As a demonstration, look at 2012—the most rapid growth of residential investment in the past two decades—in the figure below (which shows a rolling 4-quarter average of growth rates of residential investment since 1989).
The 15.3 percent growth in 2012 was the fastest since 1992, outpacing even bubble-inflated years in the mid-2000s. And yet for 2012 residential investment contributed all of 0.34 percentage points to GDP growth. Essentially it was the difference between 2011 GDP growth of (terribly disappointing) 1.8 percent and 2012 GDP growth of (still terribly disappointing if a tiny bit better) 2.2 percent.
Say that we get a full year of the fast growth rate seen in any single quarter since 1989—23 percent growth for all of 2013. This would translate into contribution of GDP of 0.7 percent. That’d be nice to have, for sure (and I think it’s unrealistic), but it would essentially be cancelled out entirely by the macroeconomic drag of the sequester alone. And since additional cuts were embedded in the recently passed continuing resolution, and no decent stimulus was passed to replace the expiring payroll tax cut, this means that the federal fiscal drag will easily overwhelm any boost from housing.
And, for the first quarter of 2013 residential investment has continued to grow nicely—12.6 percent. Yet it added just 0.3 percent to the quarter’s growth rate—dwarfed by the 0.8 percentage point subtraction contributed by declining government spending (most of that federal).
So federal fiscal policy will at least cancel out any housing boost—what do the rest of the GDP growth components look like? The figure below shows the rolling 4-quarter average of the sum of contributions from personal consumption expenditures, business fixed investment, net exports and state and local governments to GDP growth1. In 2010, some real momentum—essentially driven by the Recovery Act—can be seen. But as the Recovery Act’s spending winds down, so does forward momentum.
I’m honestly not sure where optimism about the coming years is coming from, and housing alone sure doesn’t change this.
1. I’m ignoring changes to inventories in this—it’s a notoriously volatile component and should contribute just trivially to growth over long periods of time.