by Calculated Risk on 4/02/2014 03:24:00 PM

From Margaret Jacobson and Filippo Occhino at the Cleveland Fed: The Overhang of Structures before and since the Great Recession

The economic recovery in the US has been atypically weak, and one reason for this weakness is the failure of investment to rebound as strongly as it has in previous recoveries. We are four and a half years into the recovery, and yet the real level of investment spending by businesses, households, and nonprofits on structures, equipment, and software is still below its pre-recession peak.

In turn, the current low level of investment is mainly the result of an exceptionally large and persistent drop in one of its key components, investment in structures. Structures include both residential buildings, such as homes and apartment buildings, and nonresidential buildings, such as factories, office buildings, stores, and hospitals. After peaking in early 2006, investment in residential and nonresidential structures dropped by an unprecedented 45 percent, and it began to recover late, two years after the official beginning of the recovery. Currently, it is still 29 percent below its pre-recession peak. By comparison, investment in equipment dropped by 31 percent during the recession, but it began to pick up right when the recovery started and is now above its previous peak ...

Why is investment in structures so low? One reason that is often cited is overhang, the idea that the excess, or overhang, of structures that have been built in the past is now holding investment down. Using a new indicator of the optimal level of structures—the level that would be warranted by economic conditions—we measure the level of overhang before, during, and since the recession. We find evidence that investment in structures was too high in the years leading up to the recession and that an overhang of structures has held down investment growth during the recovery.
...
According to our measure, structure overhang in the private sector increased in the first half of the 2000s, peaking at 21 percent in 2006. It remained elevated throughout 2009, and then declined rapidly during the recovery, reaching 11 percent in 2012. This suggests that overhang built up because of excessive investment before the crisis, rather than resulting from the unanticipated drop in economic activity during the Great Recession.

CR Note: I think most of the "overhang" has been absorbed for residential, although there is still an overhang for office and retail (vacancy rates are still high).