Tuesday, July 27, 2010

Predicting a double-dip recession (or not)

On July 30, the Depart of Commerce will release the first estimate of second quarter Gross Domestic Product (GDP) and its components.  One of the components most closely watched by economists (including yours truly) is Investment (I), particularly Residential Investment (RI).

RI consists of private sector investment in new single-family homes and structures, multifamily structures, home improvement, brokerage commissions, and a few other relatively insignificant items.  The chart below shows RI since 1960 and demonstrates why RI is so closely watched.  In six of the last seven recessions, RI led the way by one to two quarters. There is no such animal as the perfect leading indicator of economic downturns, but RI is, historically, one of the best we've got.  Click the image for a larger view in a new window.

Of course, the number literally went cliff-diving in 2008, falling to the lowest levels as a percentage of GDP in the post-WWII era.  It hadn't recovered much through 2009, before turning south in the first quarter of 2010.  Two straight quarters of falling RI wouldn't necessarily spell doom for the economy (see the dip in the early to mid 1990's).  But if history is any indication, another downturn would be very bad news for 2010 incumbents.  The third quarter estimate of GDP (along with the first revision of second quarter GDP and another revision of first quarter GDP) will be released in late October.

Put it this way, bad news later this week portends potentially worse news in three months, just before voters go to the polls on November 2.

Gimme some feedback in the comments.


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