This graph (click to enlarge) from Calculated Risk, shows the critical role of residential investment in the business cycle. Consumption is a much larger share of GDP, but it is stable relative to private investment, which is volatile. Declines in residential investment usually occur prior to recessions, and they tend to lead the recovery from recessions. The huge decline in residential investment makes it unique relative to previous post WW ll recessions. We are still waiting for residential investment to trigger a sharper recovery. It looks like that might be happening. Today's report on the increases in home prices is also encouraging. The major risk to a sharper recovery is political. Our dysfunctional political system is our major concern.
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