With the release of the final estimates of third quarter 2016 GDP growth (revised up three-tenths to a 3.5% growth rate), housing’s share of gross domestic product (GDP) fell 0.1 percentage point to 15.6%. The home building and remodeling component—residential fixed investment—as a share of GDP held steady at 3.5%.
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, 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.
For the third quarter, RFI comprised 3.5% of the economy, slightly shrinking from a $589 billion seasonally adjusted annual rate (SAAR) to $583 billion in inflation-adjusted 2009 dollars. The third quarter contraction of RFI subtracted 0.16 percentage points from the headline GDP growth rate (i.e. GDP would have expanded roughly 3.7% had RFI remained unchanged). A decline in RFI dragged on growth last quarter as well, making this only the second time since the Great Recession that RFI has had a negative effect on GDP growth in two consecutive quarters.
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 third quarter, housing services comprised 12.2% of the economy or $2.03 trillion (SAAR).
Taken together, housing’s share of GDP was 15.6% for the third quarter (the total does not equal the sum of the two components due to rounding).
RFI has averaged 4.7% of GDP over the past 35 years while housing services have averaged 13.3%, for a combined 18% of GDP. These shares tend to vary over the business cycle. RFI as a share of the economy, for instance, has risen 35% (from 2.6% to 3.5%) since the end of the Great Recession.
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