by Calculated Risk on 10/31/2006 01:12:00 AM

At Econbrowser, Professor Chinn revisits the relationship between Residential Investment, Business Fixed Investment and GDP growth: Skepticism about the Business Fixed Investment Handoff. Chinn quotes Robert Hall and David Papell's textbook Macroeconomics:

"Separating housing investment from business investment reveals some important timing differences. Both business investment and housing investment fluctuate widely during recessions and booms. But housing investment leads real GDP while business investment moves together with real GDP."

See the graphs from Dr. Chinn of Residential Investment (RI) vs. GDP and Non-Residential Investment vs. GDP.

Click on graph for larger image.
This graph shows the YoY change in residential investment vs. nonresidential investment. As I noted in August: In general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong.

Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment. Obviously the fall in nonresidential investment was related to the bursting of the stock market bubble. But typically changes in residential investment lead changes in nonresidential investment, and GDP, by three to five quarters.

As I noted in the comments to a previous post, both WalMart and Amazon have announced cuts in their capital spending plans. Roubini mentioned WalMart's plans today, and also pointed to the Reuters article indicating slightly weaker loan demand.

When a few companies cut capital spending plans that might increase their profits, but if a slew of companies cut capital spending, overall profits will fall.