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A Few Comments on Q3 GDP and Investment

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by Calculated Risk on 10/28/2021 11:44:00 AM

Earlier from the BEA: Gross Domestic Product, Third Quarter 2021 (Advance Estimate)

Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the third quarter of 2021, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 6.7 percent.
emphasis added

On a Q3-over-Q3 basis, GDP was up 4.9%.

The advance Q2 GDP report, at 2.0% annualized, was below expectations, due to several factors – a sharp decline in Motor vehicles and parts (due to supply constraints), a decline in residential investment, a decline in government expenditures and a negative contribution from trade.

Personal consumption expenditures (PCE) increased at a 1.6% annualized rate in Q3, a much slower pace than the previous two quarters.

The graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern – both into and out of recessions is – red, green, blue.

Of course – with the sudden economic stop due to COVID-19 – the usual pattern doesn’t apply.

The dashed gray line is the contribution from the change in private inventories.

Click on graph for larger image.

Residential investment (RI) decreased at a 7.7% annual rate in Q3. Equipment investment decreased at a 3.2% annual rate, and investment in non-residential structures decreased at a 7.3% annual rate (after getting crushed over the previous year)..

The contribution to Q3 GDP from investment in private inventories was 2.07 percentage points.

On a 3 quarter trailing average basis, RI (red) is down slightly, equipment (green) is up, and nonresidential structures (blue) is still down.

I’ll post more on the components of non-residential investment once the supplemental data is released.

The second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP decreased in Q3.

I’ll break down Residential Investment into components after the GDP details are
released.

Note: Residential investment (RI) includes new single family structures,
multifamily structures, home improvement, broker’s commissions, and a few minor
categories.

The third graph shows non-residential investment in
structures, equipment and “intellectual property products”.

Investment in non-residential structures declined in Q3 as a percent GDP, but might pickup in early 2022.

"No one seems worried about a housing bubble"

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