by Calculated Risk on 10/31/2014 05:31:00 PM

This is one of my favorite GDP graphs. The graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Note: This can't be used blindly.  Residential investment is so low as a percent of the economy that the small decline earlier this year was not  a concern.

Click on graph for larger image.

Residential investment (RI) increased at a 1.8% annual rate in Q3 - and RI only contributed 0.06 percentage points to GDP growth.  For the rate of economic growth to increase, RI will probably have to make larger positive contributions to economic growth.

Equipment investment increased at a 7.2% annual rate, and investment in non-residential structures increased at a 3.9% annual rate.  Equipment and software added 0.41 percentage points to growth in Q3 and the three quarter average moved down slightly (green).

The contribution from nonresidential investment in structures was also positive in Q3.  Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery. 

I expect to see all areas of private investment increase over the next few quarters - and that is key for stronger GDP growth.