by Calculated Risk on 2/01/2008 03:40:00 PM

Since residential investment is in a severe slump, I've been arguing that the two keys to the economy were investment in commercial real estate (CRE) and consumer spending (personal consumption expenditures or PCE). In addition, one of the keys to PCE was MEW (mortgage equity withdrawal). Sorry for all the acronyms!

Yesterday the data from the Bureau of Economic Analysis (BEA) showed that MEW was still strong in Q4, providing support for consumer spending. However, a large portion of MEW was from preexisting home equity lines of credit (HELOCs), and there has been a significant development with several banks now suspending HELOCs or severely limiting withdrawals.

Mathew Padilla at the O.C. Register commented: Some lenders shut home ATMs

[S]uch a move can be a shocker to folks who were sold on the idea that a HELOC could be a safety net for a rainy day, especially if the rainy day has arrived in the form of a job loss, illness or some other special circumstance.

I'd argue the evidence suggests some homeowners have been using their rainy day funds already. Now, for many, that source of funds is being shut down.

I believe we will now see a further decline in MEW, and a corresponding slump in consumer spending.

On CRE, the evidence suggests spending was strong through Q4, but is about to slow sharply. Earlier today construction spending was released, and once again it showed that private nonresidential construction somewhat offset the decline in residential construction.

Click on graph for larger image.

(repeating graph from earlier post) Over the last couple of years, as residential spending has declined, nonresidential has been very strong. There is plenty of evidence - like the Fed's Loan Officer Survey - that suggests a slowdown in nonresidential spending is imminent, but it still hasn't shown up in the construction spending numbers. The January 2008 Loan Officer Survey should be released at any time and I expect the numbers to be grim.

The good news is that CRE wasn't as overbuilt as in the '80s.

This graph shows non-residential investment in structures as a percent of GDP. Note the huge spike in the '80s.

Still, if both PCE and CRE slump in Q1 as I expect, the recession will definitely be here (I think it started in December).

Meanwhile, ECRI is coming around: Gauge of economy falls, recession looms: ECRI

A weekly gauge of future U.S. economic growth fell hard and its annualized growth rate plunged to a six-year low ... indicating the risk of recession is very high.
...
"[T]he window of opportunity to avert a U.S. recession is about to slam shut." [said Lakshman Achuthan, managing director at ECRI]