by Calculated Risk on 7/31/2009 08:53:00 AM

The investment slump continued in Q2 ...

Click on graph for larger image in new window.

Residential investment (RI) has been declining for 14 consecutive quarters, and the decline in Q2 was still very large - a 29.3% annual rate in Q2.

This puts RI as a percent of GDP at 2.4%, by far the lowest level since WWII.

The second graph shows non-residential investment as a percent of GDP. All areas of investment are declining.

Business investment in equipment and software was off 9.0% (annualized) and has declined for 6 consecutive quarters. Investment in non-residential structures was only off 8.9% (annualized) and will probably fall sharply over the next year or so.

The third graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures. The graph shows the rolling 4 quarters for each investment category.

This is important to follow because residential tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

Residential investment (red) has been a huge drag on the economy for the last three and a half years. The good news is the drag on GDP will probably end soon. The bad news is any rebound in residential investment will probably be small because of the huge overhang of existing inventory.

As expected, nonresidential investment - both structures (blue), and equipment and software (green) - declined in Q2. If there is a surprise it is how well nonresidential investment in structures held up in Q2 (although we could see this in the construction spending data). This investment will decline sharply soon as many major projects are completed, and few new projects are started.

In previous downturns the economy recovered long before nonresidential investment in structures recovered - and that will probably be true again this time.

As always, residential investment is the most important investment area to follow - and I expect it to turn slightly positive in the second half of 2009.