U.S. Economy Taps Into Dry Powder

ecoThere’s a big reason to believe that the U.S. economy will be able to withstand the start of the Fed tightening cycle: There’s still plenty of pent up activity in the housing sector. And it’s hard to see the U.S. economy running out of steam with this much upside left in residential investment, according to some economists and analysts.?

Going back to the 1940s, the U.S. central bank has never embarked upon a tightening phase with housing having so much room to run to the upside.

This chart shows residential investment’s share of nominal gross domestic product, with the start of the previous six rate hike cycles denoted with a circle.

The severity of the housing bust prompted activity in this sector to stay at depressed levels, even with the Great Recession getting farther away in the rear view mirror.

Residential investment accounts for 3.34 percent of nominal gross domestic product, as of Q2 2015, well below its long-run average of 4.56 percent, as Macquarie analyst David Doyle has observed. The Fed has not initiated a series of rate hikes at a time when residential investment’s share of gross domestic product is more than one standard deviation below its long-run average since at least 1970.

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