Residential Fixed Investment Slows in Second Quarter

The final estimate of second quarter 2017 GDP growth (revised up two-tenths of a percentage point to 1.4%), shows that housing’s share of gross domestic product (GDP) declined from 15.6% to 15.5%.

Likewise, the home building and remodeling component—residential fixed investment (RFI)—fell 0.1 percentage point to 3.5% as a share of GDP.  The slower second-quarter growth of RFI subtracted 0.3 percentage point to the headline GDP growth rate (i.e. GDP would have expanded 3.4% rather than 3.1% had RFI remained unchanged).  Even so, the moving average of RFI’s contribution to GDP growth remains roughly +0.14 percentage point.  This share has been positive since the start of 2011 and is in stark contrast with the 2008 low of -1.25 percentage points.

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

The first is through RFI—effectively the measure of the home building, multifamily development, and remodeling contributions to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes, and brokers’ fees.

RFI comprised 3.5% of the economy in the second quarter of 2017.  In nominal terms, RFI fell from a $606 billion seasonally adjusted annual rate (SAAR) to $594 billion in inflation-adjusted 2009 dollars—a 1.9% decrease.  This quarter’s decline in RFI is only the fifth since the fourth quarter of 2010.

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.  In the second quarter, housing services comprised 12.0% of the economy or $2.05 trillion (SAAR).

Taken together, housing’s share of GDP was 15.5% in the first quarter.

RFI and housing services have averaged 4.6% and 13.2% of GDP, respectively, over the past 35 years for a combined 17.8% of GDP. These shares tend to vary over the business cycle. RFI as a share of the economy, for instance, has risen 33% (from 2.6% to 3.6%) since the end of the Great Recession.



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