Introduction Objective Generally speaking, economists believe that recessions (a decrease in...
1
Introduction Objective Paul 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 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, 1 st quarter Netherlands 2008, 1 st quarter Belgium 2008, 2 nd quarter New Zealand 2007, 4 th quarter Canada 2007, 3 rd quarter Portugal 2007, 1 st quarter Czech Republic 2008, 1 st quarter Slovak Republic 2008, 1 st quarter France 2008, 1 st quarter South Korea 2008, 1 st quarter Germany 2008, 1 st quarter Spain 2007, 3 rd quarter Greece 2008, 2 nd quarter Sweden 2007, 4 th quarter Italy 2008, 2 nd quarter Switzerland 2007, 4 th quarter Japan 2008, 1 st quarter U.S. 2008, 1 st quarter 9 out of 13 U.S. recessions over the 1947-2009 period have been preceded by below-normal spending on residential investment 1947Q2 1949Q2 1951Q2 1953Q2 1955Q2 1957Q2 1959Q2 1961Q2 1963Q2 1965Q2 1967Q2 1969Q2 1971Q2 1973Q2 1975Q2 1977Q2 1979Q2 1981Q2 1983Q2 1985Q2 1987Q2 1989Q2 1991Q2 1993Q2 1995Q2 1997Q2 1999Q2 2001Q2 2003Q2 2005Q2 2007Q2 2009Q2 -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 Consumption Investment Residential Investment Government Net 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 Consumption Investment Residential Investment Government Net 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 Consumption Investment Residential Investment Government Net 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 Growth U.S. Consumption Investment Residential Investment Government Net 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 Growth New Zealand Consumption Investment Residential Investment Government Net Exports 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% Abnormal Contributions to GDP Growth Netherlands Consumption Investment Residential Investment Government Net 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
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Transcript of 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
