by Calculated Risk on 4/02/2007 11:29:00 PM

In the typical business cycle, non-residential investment follows residential investment. In a previous post, I presented the typical lag times for the two components of non-residential investment: 1) equipment and software, and 2) non-residential structures.

Click on graph for larger image.

The highest correlation for equipment and software is a lag of 2 to 3 quarters, and for structures a lag of 4 to 5 quarters. There is a positive correlation for other periods also.

The YoY change in residential investment turned negative in Q2 2006 (quarterly residential investment turned negative in Q4 2005).

For equipment and software, investment declined in two of the last three quarters. With a lag of 3 quarters, the YoY change would turn negative in Q1 2007. Of course the lag might be longer, or YoY investment might not turn negative this time. But it would be reasonable to expect the YoY change to turn negative soon.

So the only real surprise, in the following BusinessWeek article, is that BusinessWeek is, well, surprised!

From BusinessWeek: The Real Economic Threat: Weak Capital Spending

What's the biggest threat to the economy? The housing slump, right? After all, therein lies the greatest potential to derail consumer spending. Well, think again. Amid all the headlines about builders' woes, sagging home prices, and shaky subprime mortgages, there's some trouble brewing in another sector, perhaps more crucial to the outlook: capital spending.

And also from BusinessWeek is an article about consumers turning to credit card debt to partially offset less mortgage equity withdrawal: Borrowing Like There's No Tomorrow

Consumers are piling up credit-card debt at the fastest pace in years, and the housing downturn may be the reason. ...

The timing of the acceleration in revolving credit suggests consumers are turning to their credit cards as a partial replacement for reduced mortgage equity withdrawal ...

Kudos to dryfly for predicting this in the comments over a year ago.