Third Quarter GDP Growth: Gaining Strength, But Where’s Housing?

The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the third quarter of 2011. GDP grew at a seasonally adjusted annual rate of 2.5 percent. This is up from 1.3 percent in the second quarter and 0.4 percent in the first quarter. The BEA cautions that the advance estimate is based on data that are incomplete and subject to revision. While revisions from advance to third estimates of GDP growth average 0.6 percent (without regard to sign), the BEA states that the quarterly estimates correctly indicate whether GDP growth is accelerating or decelerating 72 percent of the time. This suggests the improvement so far this year, following the dramatic slowdown from early 2010, is likely to be sustained in the second and third estimates.

The biggest contributions to growth came from accelerating personal consumption expenditures (PCE), which grew at a 2.4 percent annual rate, after a disappointing slowdown to 0.4 percent in the second quarter, and fixed investment, based on the strength of spending on equipment and software. Residential fixed investment (RFI), housing’s contribution to GDP got lost in the rounding.

Despite the sheer size of the consumption component of GDP, historically it is the investment component that is the most responsive to the business cycle, declining more in recessions and growing faster in recoveries, and thus exerting outsized influence at turning points in the cycle.

This influence can be seen in the rise and fall of investment’s share of GDP surrounding recessions. These movements are much more pronounced than those of the other GDP components: consumption, government spending and net exports, indicating more rapid growth or contraction.

Focusing on the two largest subcomponents within investment: RFI and equipment and software, it is clear that housing has been holding back a more robust investment contribution in the current recovery. While spending on equipment and software has risen 31 percent since the end of the recession, RFI has declined by 2 percent, leaving its share of GDP at historic lows and its contribution to a broader economic recovery conspicuously absent by historical standards. Without a recovery in the housing sector, the economic recovery will remain weak.

 



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