Contribution to GDP

[cthulu2016]

Last edited Fri Jul 27, 2012, 05:24 PM - Edit history (1)

The technical recession ended with a huge inventory rebuild. (Everyone stopped restocking at the same time when the economy collapsed, and everyone had to restock at the same time when it became apparent that there were still customers, though not as many as before.) But for a recession that is not about cyclical inventory it takes investment, rather than mere inventory churning, to lead the way out.

This chart does a wonderful job of showing why a housing bubble burst is different. When housing is the problem then we lose the usual solution, which is housing demand. Look at how housing led the way out of the 1982 recession, compared with our current sluggish recovery. That is not because Reagan is cooler than Obama. It is because in 1982 there was pent-up housing demand and the Fed had room to cut rates by 8 points. It was an interest rate induced recession and an interest rate induced recovery. A bursting housing bubble is a perfect storm of non-recovery. That is why 1982 was really the "great recession" and what we have today is the "lesser depression."

The first harbinger of real recovery came late 2011-2012 when residential investment moved unambiguously into positive-growth territory.

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered 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.

For the following 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.

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



Read more at http://www.calculatedriskblog.com/#I2T58vXe6KWiCMUT.99

[1StrongBlackMan]

1. So, in lay terms ...

consumer demand (e.g., the working class folks buying homes and/or stuff for their homes) really does drive the economy?

[cthulu2016]

2. Yup. (With housing particularly important.)

[laundry_queen]

3. One big error made

In keynesian economics, when the business cycle is on its way up, policies are supposed to be enacted to cool growth and smooth out the peak so there isn't as much of a trough later. What happened in the US, was that instead policies were enacted to enhance the growth and help the rich get richer more quickly. The policies multiplied the growth to an obscene level. For instance, interest rates never went up to temper the housing market. So when the crash happened, there was zero room for them to manoever and the only way they could cushion the blow was government spending, since lowering interest rates below zero is impossible.

Right now the housing market in Canada has been hot. There was a slight dip in 2008/2009 but it recovered quickly. In some markets, there are still bidding wars. The government has been trying numerous different tactics to try to cool the housing market - reducing mortgages from 35 yrs amortization period to 30 years to now 25 years. Increasing down payment requirements. Making it more difficult to qualify for a mortgage. I think this is because most economists know that the higher you rise the bigger the fall. It's as important to cool a hot economy as it is to stimulate a lagging one.

[cthulu2016]

4. Yes, Greenspan did over-stimulate. 9/11 was a factor.

I think it is fair to say that 9/11 was a major cause of the housing bubble. The Fed cut rates during the post internet bubble recession, which was fine, but then at a point when the Fed would have starting thinking about raising rates 9/11 came along and Greenspan cut rates further.

Then Bernanke (correctly) raised rates briskly when he came in in 2005, but the damage was already baked in the cake.

It was not known whether the disruptive effects of 9/11 would cause a global double-dip, so I cannot fault Greenspan for not knowing, but I do fault him for using the wrong indicator.

Greenspan seems to have always used the stock market as THE indicator of the economic future, and misunderstood the Fed's mandate. The Fed is supposed to keep both unemployment and inflation low. Period. The Fed has no mandate to keep the stock market high. But Greenspan seemed, throughout his career beginning with the crash of 1987, to see managing the stock market as his real job.

[cthulu2016]

5. .