I've been on a bit of a break -- from blogging in any event -- and my intention was to indulge in a bit old news gathering, catching up with all the commentary in blogland about a very busy, and somewhat depressing, week past in economic news from the United States. That was my intention, but I couldn't get beyond Beat the Press, and these comments from Dean Baker:
The Commerce Department reported that non-residential construction fell by 0.7 percent in October following a downwardly revised fall of 0.6 percent in September.
This should put to an end silly claims that growth in the non-residential sector would offset plummeting residential construction. The residential sector is twice as large as the non-residential sector, which by itself made such an offset unlikely. Furthermore, there was no basis for any sustained boom in the non-residential sector. There is still plenty of vacant office space, retail stores are cutting back, the manufacturing sector is stagnant or declining -- what would support a boom?
There are a couple of points worth following up there. First, the size of a sector is not really the issue. It was conventional wisdom for years that business cycles were driven by unwanted fluctuations in inventories. (In fact one popular explanation of the "Great Moderation" appeals to improvements in inventory management techniques). The point was never that inventories are a large share of GDP, but that inventories are a large share of changes in GDP, are signals about the course of demand more generally, and are important drivers of production decisions.
Second, Dr. Baker means that investment in residential structures is twice as large as investment in non-residential structures, not non-residential investment more broadly. Among the people I know, the claim -- hope, really -- has been that spending on housing construction will be partially offset by robust business fixed investment more generally, which is the sum of firm expenditure on software and equipment, as well as nonresidential construction. That business fixed investment is the biggest part of total investment spending is clear...
... and it is holding up quite nicely:
Add the required partially qualifier, and the claims are not as silly as Dean Baker makes out.
He continues:
Friday's data also included a release from the Institute of Supply Management that showed the manufacturing sector declining in November and weaker than expected car sales.
True, but if you are going to play the game of arguing that investment in nonresidential structures are not as big a share of GDP as residential investment, you should probably acknowledge that goods-producing industries only constitute 20 percent of GDP (in value added terms). And you know the news today from the much larger service sector. From Reuters:
U.S. stocks advanced on Tuesday after stronger-than-expected data on the services sector and a tamer-than-expected rise in labor costs pointed to economic and profit growth with moderating inflation...
The Institute for Supply Management's services index rose in November. Economists surveyed by Reuters had expected it to decline.
"The service sector is really what is holding the whole economy together and providing the impetus for growth," said Michael Metz, chief investment strategist at Oppenheimer & Co. in New York.
It is also true, as the Baker post emphasizes, that several forward-looking measures of business activity are looking pretty weak. But even here the messages are mixed:
Not much new business, to be sure, but it looks like plenty of existing business to keep busy for awhile.
OK, here's something we can agree on:
Remember, economists and economic reporters are very slow to recognize recessions. For the most part, they did not recognize that we were in the 2001 recession until it was almost over. My guess is that they will not be any quicker this time around.
My sentiments exactly, but I would point out it cuts both ways. We economists may not be very good at predicting recessions that do occur, but we are no better at predicting the ones that don't.