Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 6

Housing’s Role in a Recovery
Michael W. McCracken, Research Officer and Economist

Three years ago an article1 in this publication dispresently making a negative contribution. To some degree
cussed the relationship between housing and thethis should be expected. The dramatic declines in housing“R” word—“R” meaning recession, a term no one
prices during the recession created a glut of existing homes
wanted to use (lest they jinx the economy) but nevertheeither already on or waiting to be put on the market once
less were thinking about. Now, after the worst recession
prices stabilize and start increasing. This “shadow inventory”
since the Great Depression, we consider a different “R”
of existing homes substantially dampens the need for new
word—recovery. The fact that many of the same concerns
home construction.
in the housing market remain raises this question: How
important is housing in an economic recovery?
Housing tends to contribute
Somewhat surprisingly, the housing component of GDP(more formally known as residential investment) tends tosignificantly to an economic recovery.
be a solid contributor to GDP growth during a recovery.
Historically, residential investment has contributed only
about 5 percent of GDP—a small share considering theSo does this mean we won’t see continued recovery inconsumption component is close to 70 percent. Neverthethe coming year? Not necessarily. It does, however, suggest
less, smaller components such as residential investment dothat the contribution from residential investment is likely
at times punch above their weight, which is evident when
to be smaller than normal, or that it may be delayed subtheir effects are measured using growth rates rather thanstantially. In any case, it should be kept in mind that resilevels. That is, although residential investment is a small
dential investment is not the only expenditure component
component of GDP in levels, it can contribute substantialof GDP. As noted above, consumption is the largest comly to the GDP growth rate for short periods of time.
ponent of GDP and, as such, is most likely to contribute
The chart illustrates the relationshipbetween residential investment and the
Residential Investment Contributions to Percent Change
business cycle over the past 35 years. Itin Real GDP, Rolling 4 Quarters
plots the rolling 4-quarter percentage conPercent Contribution
tribution of residential investment to GDP
2.0growth. Over the period, residential investment contributed on average a meager 3
1.5
basis points to GDP growth. In contrast,
1.0
excluding the recent recession, residential
investment typically contributes at least 50
0.5
basis points to GDP growth within two years
0following a recession. This suggests that,–0.5
although residential investment is not amajor component of GDP growth on aver–1.0
age, its growth typically helps during an
Real Residential–1.5
economic recovery.
Investment
However, a year and a half after the offi–2.0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
cial end of the recent recession, residential
NOTE: Gray bars indicate recessions determined by the National Bureau of Economic Research.
investment has yet to make a sizable contribution to GDP growth and is, in fact,

Economic SYNOPSES

Federal Reserve Bank of St. Louissignificantly to GDP growth. However, such consumptiondriven growth can also be hindered, at least indirectly, byresidential investment, through its effect on the employmentof construction workers—a group with a current unemployment rate of over 20 percent and thus unlikely to be in a
spending mood. ■1 Thornton, Daniel L. “Housing and the ‘R’ Word.” Federal Reserve Bank ofSt. Louis National Economic Trends, February 2008;
http://research.stlouisfed.org/publications/net/20080101/netpub.pdf.

Posted on February 24, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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