introduction objective generally speaking, economists believe that recessions (a decrease in...

Introduction

Objective

Paul Stroik & Laura Berlinghieri • Economics Department • UW-Eau ClairePaul Stroik & Laura Berlinghieri • Economics Department • UW-Eau Claire

Generally speaking, economists believe that recessions (a decrease in production or GDP) begin with a slump in investment spending by businesses (e.g. buildings, machinery, equipment), which is why the short-run fluctuations in the economy are referred to as the “business cycle.”

Previous research for the U.S. finds that spending on residential investment (housing), a subcategory of investment spending, is below normal leading into recessions and, therefore, contributes significant weakness to the growth rate of GDP as the U.S. economy enters a recession.

Determine whether or not below-normal spending on residential investment (housing) contributed significant weakness to GDP growth leading into the most recent recession for a group of developed countries.

Residential Investment & the Business Cycle:International Evidence

Residential Investment & the Business Cycle:International Evidence

Methods

Results Three countries, in addition to the U.S., showed below-normal (downward-sloping) spending on residential

investment prior to the most recent recession: Czech Republic, Greece, Japan.

The remaining three countries (France, Italy, Switzerland) were inconclusive; there did not appear to be significant weakness in just one spending category prior to the most recent recession.

Conclusions Even though below-normal spending on residential investment (housing) played a significant role in the most recent

recession in the U.S, this is not observed in the majority of the developed countries examined in this study. A few countries experienced below-normal spending by the government while many others encountered net exports that were below normal.

Further research will investigate whether these cross-country differences can be explained by differences in housing finance structures and/or incentives for homeownership observed across these 18 countries.

Acknowledgements We would like to acknowledge funding support from UW-Eau Claire’s Office of Research and Sponsored Programs

and Differential Tuition.

Collect GDP data for 18 countries from the Organization of Economic Cooperation and Development (OECD) database as well as national statistical agencies

For each country… Calculate “normal” contributions to GDP growth for each of the four categories of GDP as well as the subcategory of

residential investment• Use kernel density estimates to determine the normal contributions

Subtract the normal contribution from the actual contribution to obtain the “abnormal” contribution to GDP growth for each category

Calculate the cumulative abnormal contributions to GDP growth Create charts to visually represent the cumulative abnormal contributions to GDP growth for each of the four GDP

categories as well as the subcategory of residential investment• A downward-sloping line means that the contribution of the category/subcategory is below normal.• An upward-sloping line means that the contribution of the category/subcategory is above normal.• A horizontal line means that the contribution of the category/subcategory is normal.

Inspect the set of charts for each country in order to determine what category/subcategory of GDP was below normal prior to the most recent recession

Country Recession Start Date Country Recession Start Date

Australia 2008, 1st quarter Netherlands 2008, 1st quarter

Belgium 2008, 2nd quarter New Zealand 2007, 4th quarter

Canada 2007, 3rd quarter Portugal 2007, 1st quarter

Czech Republic 2008, 1st quarter Slovak Republic 2008, 1st quarter

France 2008, 1st quarter South Korea 2008, 1st quarter

Germany 2008, 1st quarter Spain 2007, 3rd quarter

Greece 2008, 2nd quarter Sweden 2007, 4th quarter

Italy 2008, 2nd quarter Switzerland 2007, 4th quarter

Japan 2008, 1st quarter U.S. 2008, 1st quarter

9 out of 13 U.S. recessions over the 1947-2009 period have been preceded by below-normal

spending on residential investment

19

47

Q2

19

49

Q1

19

50

Q4

19

52

Q3

19

54

Q2

19

56

Q1

19

57

Q4

19

59

Q3

19

61

Q2

19

63

Q1

19

64

Q4

19

66

Q3

19

68

Q2

19

70

Q1

19

71

Q4

19

73

Q3

19

75

Q2

19

77

Q1

19

78

Q4

19

80

Q3

19

82

Q2

19

84

Q1

19

85

Q4

19

87

Q3

19

89

Q2

19

91

Q1

19

92

Q4

19

94

Q3

19

96

Q2

19

98

Q1

19

99

Q4

20

01

Q3

20

03

Q2

20

05

Q1

20

06

Q4

20

08

Q3

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

U.S. Recessions, 1947-2009 (Shaded) & Spending on Residential Investment*

*Downward-sloping line indicates spending that is below normal.

2007Q1 2007Q2 2007Q3 2007Q4 2008Q1

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Abnormal Contributions to GDP Growth Japan

ConsumptionInvestmentResidential InvestmentGovernmentNet Exports

2007Q2 2007Q3 2007Q4 2008Q1 2008Q2

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Abnormal Contributions to GDP Growth Greece

ConsumptionInvestmentResidential InvestmentGovernmentNet Exports

2007Q1 2007Q2 2007Q3 2007Q4 2008Q1

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Abnormal Contributions to GDP Growth Czech Republic

ConsumptionInvestmentResidential InvestmentGovernmentNet Exports

2007Q1 2007Q2 2007Q3 2007Q4 2008Q1

-6.0%

-4.5%

-3.0%

-1.5%

0.0%

1.5%

3.0%

4.5%

Abnormal Contributions to GDP GrowthU.S.

ConsumptionInvestmentResidential InvestmentGovernmentNet Exports

Eleven countries experienced below-normal (downward-sloping) spending in a different component of GDP (e.g. government spending, net exports) prior to the most recent recession. Examples shown below.

2006Q4 2007Q1 2007Q2 2007Q3 2007Q4

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Abnormal Contributions to GDP GrowthNew Zealand

ConsumptionInvestmentResidential InvestmentGovernmentNet Exports

2007Q1 2007Q2 2007Q3 2007Q4 2008Q1

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Abnormal Contributions to GDP GrowthNetherlands

ConsumptionInvestmentResidential InvestmentGovernmentNet Exports

Other countries with below-normal government spending: South Korea, Portugal

Other countries with below-normal spending in net exports: Australia, Belgium, Canada, Germany, Slovak Republic, Spain, Sweden