Housing and GDP ? Modeled Behavior

Charted below is the relationship between housing permits and the contribution of Residential Investment to GDP up through the end of last year.

The relationship is perfect, in part because there are more things than new construction in Residential Investment ? the Realty industry, home improvements, renovations, etc ? but the relationship is nonetheless pronounced.

If permits continue on their current trajectory of roughly 30% Y-o-Y growth it would not be unrealistic to expect a direct contribution to GDP growth of in excess of 1 percentage point. We?ve just spent a little over a year or so with residential construction making no contribution so as a baseline you could think of it as the GDP over the last 18 months plus 1 point.

Presumably, however, there is some multiplier here so you could imagine adding perhaps 1.5 points to GDP. If you also imagine removing the reduction from the drag of state and local government we could get up to 2 additional points. This would take year-over-year real GDP growth from something like 2% to something like 4%.

Now, all of this is subject to the Sumner Critique. That is, we are assuming that the Fed does not have a firm implicit Nominal GDP target. If the Fed does have such a target then it will slow the growth of the economy and prevent this from happening.

Like this:

Be the first to like this post.

joe biden cspan state of the union drinking game oscar noms capital gains tim thomas oral roberts