Economy Watch: How Sectors Actually Performed as Part of Q1 GDP

We already know the economy turned in a weak first quarter. Newly released details point a solid finger at the energy sector for the non-residential real estate plunge.

We already know the economy turned in a weak first quarter, with a moderate increase in residential investment and a big decrease in non-residential investment. Details released by the Bureau of Economic Analysis yesterday provided further insight, including solid finger-pointing at the energy sector for that non-residential plunge.

According to BEA real estate data that breaks down total spending on most property types as a percentage of GDP, once contraction in the energy sector, including oil exportation and electrical infrastructure spending, was taken out of the equation, spending on non-residential structures didn’t actually change. The office sector is growing again, representing about 0.25 percent of the economy, although it comprised a greater proportion before the recession, with more than 0.4 percent, and during the 1980s—which weren’t called the days of go-go office development for nothing—the sector peaked at nearly 0.9 percent of the economy. That was partly a function of Baby Boomers entering the workforce, in droves. Retail and hospitality showed similar performance, also improving in this post-recession year but likewise low compared to previous decades, coming in at about 0.1 percent of GDP these days.

The same goes for multi-family: Despite the intense demand for multi-family properties in the post-recession period, investment in that sector isn’t as much (again, as a percentage of GDP) as it was before the recession, though it’s recovered somewhat, to roughly 0.25 percent of GDP. In the 2000s, multi-family represented much closer to 0.5 percent, and back in the 1960s and ’70s, the sector was usually more than 0.5 percent and occasionally more than 1 percent. As metro areas expanded during those decades and the Baby Boomers formed households, apartments were the thing to develop (and the NIMBY prejudice against apartments in some places didn’t really catch on until the 1990s). Will the Millennials in their turn spur such a vast increase in apartment development? So far, there’s no answer on that.

Investment in single-family housing as a percentage of GDP was up a bit in the first quarter, to just over 1 percent. That’s the highest that kind of investment has been since the crash in residential construction beginning in 2007 and bottoming out about two years later. At the peak of the housing bubble, single-family housing represented nearly 3.5 percent of GDP, clearly (in retrospect) an unsustainable level. At the bottom of the crash, single-housing was barely more than 0.5 percent of GDP, which probably isn’t enough. In fact, housing’s share of the economy was so low that home improvement (which is calculated separately) was a larger share of the economy than the houses themselves.