Watching the Economy by Clint Burdett CMC® FIMC

January 5, 2014

Will Residential Investment Improve Economic Growth? 2014 Looks Good

In mid-2013 Alan Greenspan observed that fixed investment by corporations was being held back and there is a close correlation to the 5yr - 30yr Federal Bond spread (note Greenspan adjusted the vertical axes to overlay the two series to show the relationship; the investment right axis range is 1.2 percent to left axis Treasury spread range of 6 percent).

When the shorter term minus longer term rate is negative, investors are thinking long term since long term rates are depressed compared to short term rates. I am going to use 2 year minus 10 year Treasury note interest spread in my comparison starting in 1976 to avoid adjustments.

Total Private Fixed Investment and the included component Private Residential Investment in billions of dollars suggests we are close to the total Private Fixed Investment pre-Great Recession peak but not close to the residential fixed investment peak. Since housing was in a bubble, that is not bad given the housing foreclosure overhang is finally being worked off.

The assumption is residential building growth will return to a reasonable pace, borrowed money is cheap and thereby spur economic growth.

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Looking at the data entering 2014, using the 2yr-10yr Treasury Note spread shows total Private Fixed Investment is increasing as the Fed suppresses interest rates using QE3 bond purchases. Note the axes are not adjusted in this chart or the next chart so you can compare the magnitude of change.

The percentage change to the previous year for total Private Fixed Investment is slightly rebounding, supporting moderate growth predictions.

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Breaking out the Private Residential Investment component percentage change to previous year, we see again that with the 2yr-10yr spread sloping down (long term interest rates favor funding construction), residential investment (building single family and multi-unit residences) is accelerating compared to the previous year.

This is the event most are using to predict 2014 will be a good year.

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