March 18, 2019 glacierinvest

Sluggish GDP growth has been a concern for the past 10 years, following the last recession. Many papers have been written and many opinions have been offered. Academic studies demonstrated that overhangs after financial crises can lead to below average economic growth for a number of years. Additionally, high debt levels relative to a country’s GDP can eventually stunt growth. In reality, there are likely several factors contributing to lower economic growth than we experienced in the years and decades leading up to the Great Financial Crisis.

For example, the consumer was a major driving force behind growth the US experienced in the 80’s, 90’s and 00’s, which can be seen in the image below as a percent of GDP. The consumer increasingly came to represent a larger share of overall GDP over the course of 30 years. While the consumer represents a larger percentage of GDP today than it did on the eve of the last recession (barely), the rising share of consumer spending as a percent of GDP has noticeably leveled off since the last recession.

Through another lens, we see the YoY growth in consumer spending was in a downtrend over the same 30 year period that it was gaining share as a percent of GDP. Since the recession, the trend has stabilized and we appear to be in a very slight uptrend. However, the YoY growth rates we’ve experienced this cycle are the lowest in a non-recessionary period, or coming out of a recession, since the 1950’s and 1960s, which seems to support the recession severity thesis (the more severe the recession the more sluggish and prolonged the recovery).

Quickly touching on the other components of GDP, we can see private fixed investment is basically at the lowest levels on record (except for short periods of time coming out of previous recessions), which many have theorized is a result of an uncertain economic and/or regulatory environment, a lack of suitable investment opportunities, etc… While I don’t have a dog in the share buyback fight, I wonder if there has been a crowding out effect for fixed investment. Interestingly, there was an opinion piece on Bloomberg last week citing Ed Yardeni’s mea culpa about share buybacks. I didn’t intend to write about share buybacks but this opinion piece came to mind as I was looking at the fixed investment trends.

Another interesting chart is the trend in net exports as a percentage of GDP, which have been negative ever since the mid-70s. The attempt to balance trade doesn’t seem like it’s particularly necessary given how prosperous the country has been over that time frame. Granted, prosperity wasn’t equally distributed with many missing out.

The final, and among the most contentious, components of GDP is government spending, which, contrary to popular opinion in certain circles, has  been in a downtrend since the mid-50s. Sure the dollar amounts have increased dramatically but so has the dollar value of economic output. Of note, government spending as a percent of GDP is down over 20% from the last recession.

Private Residential Fixed Investment

I want to zero in on small part of GDP (<4%) because there are some very interesting changes occurring that could have a meaningful impact on certain parts of the economy and within certain sectors of the stock market: private residential fixed investment. While this section of the economy is a little over 10% below last cycle’s peak, which was the highest level ever reached (major housing boom), as a percentage of GDP it is over 40% below last cycle’s peak! It’s actually at it’s lowest non-recessionary (or coming right out of a recession) level since the 1960’s.


Some, if not most, of this sluggishness is surely related to the overhang from the housing bust and plethora of foreclosures that were a tremendous drag on several markets for years following the last recession. Another contributor was likely the preference for renting which supposedly was the way of the future. Apartments clearly benefited during this period and had a prolonged cycle of increasing rents. This super cycle of sorts was driven in large part by demographics in addition to people’s inability to buy a home. Ownership was supposedly dead and, frankly, I wasn’t sure home ownership would again reach, in my lifetime, the levels we were accustomed to seeing in more normal times like the 1980’s and 1990’s.

At the end of 2018, the homeownership rate in the US was back at 64.8% of total households, which is 40bp (0.40%) below the long-term average since records started being kept (65.2%).

. Additionally, the rate at the end of 2018 was equal to the highest rate in the whole decade of the 1980’s.

So much for the end of homeownership as we knew it. While this metric doesn’t capture all the issues with the housing market, such as lack of household formation due to adult children living at home, it certainly appears we are well on our way, if not already there, to having a fairly healthy housing market again.

The Kicker

I came across the below chart on Calculated Risk last week that really got me thinking and caused me to dig in to the housing market’s impact on GDP growth for the last several years. The two things that caught my eye were the following:

  1. The size of the 20-29 age cohort basically peaked last year. This is the group most likely to rent. From 2010 to 2018 the group increased by nearly 10%, thus driving demand for apartments and pushing up rents (these weren’t the only drivers).
  2. The size of the 30-39 age cohort is expected to increase by nearly 12% over the next 10 years. This is the group most likely to be first time home buyers. Bill McBride, the author of the Calulated Risk blog, stated he expected single family housing starts to continue to increase as a result of this trend. I don’t think you can really argue with the data here. Of course there may be other impediments to members of this group buying a home (inability to obtain financing, poor credit history, lack of inventory available for purchase, etc…). It still seems likely there will be more buyers coming into the market in the next 10 years which is a plus for homebuilders who are likely to increase their output.

As mentioned above, private fixed residential investment makes up less than 4% of GDP. However historically over the past 40 years during non-financial engineered periods, it has comprised nearly 6% of GDP at different times. Whether it reaches those levels again or not is anybody’s guess but it seems like it will increase its share of GDP in the coming decade, which is good for homebuilders and the companies that sell the products builders use. Additionally, new homeowners tend to spend money on furniture and other related home goods which could potentially sustain and even drive consumer spending higher.

While we continue to feel the effects of the severity of the last recession, there continue to be bright spots as our economy heals. Yes, we have challenges but there will always be challenges. It appears housing has the potential to be a meaningful contributor to GDP growth in the coming decade.