The Insider's Guide to Economic Forecasting

Investment in structures did grow during the first quarter of this year, but for only the second time since early 2001 (the other time being a temporary blip in the third quarter of 2001). However, the growth rate was a meager 0.4% a year and investment is still down 25% since the last quarter of 2000. Few businesses are currently looking to expand -- and therefore have no need to build offices. A strong rebound in investment in structures may be a while coming. Even once businesses start thinking of hiring new employees, they won't need to invest in new construction if there is still office or factory space left over from the last boom. That was the experience after the last recession. Employment growth had already picked up by 1994, but it was another few years before investment in structures began to grow rapidly.

The last recession suggests, however, that when investment in office structures stops falling, employment will soon rise. It is a sign that businesses have put pessimism behind them. The latest data may be hopeful if the scanty growth of the first quarter of this year establishes that structure investment has bottomed out.

Data: Investment in nonresidential structures is available as part of the Bureau of Labor Statistics' NIPA series -- the same series that includes GDP. Go to the Bureau of Economic Analysis website at www.bea.doc.gov. Click on "GDP and related data" and then on "Select data from the full set of NIPA tables." Follow the link to the list of all NIPA tables. Look for Table 5.5, "Real Private Fixed Investment by Type," under the "Savings and Investment section."

Housing Prices

In 2001, many predicted that, with more than half of Americans invested in the stock market in one way or another, the fall of share prices would make consumers feel less wealthy, and thus encourage a new wave of frugality -- meaning an even deeper economic downturn. But the American consumer defied all expectations, not only increasing spending by a respectable 2.5% -- but actually buying big-ticket items such as automobiles and homes.

Top economists at the Federal Reserve and elsewhere are starting to appreciate that for most middle-income families the most powerful thing impacting the so called "wealth effect" -- the degree to which one's perceptions of personal wealth affects spending and consumer resilience -- may be the value of one's home. Influential economists Robert Shiller, author of Irrational Exuberance, and Karl Case and John Quigley found in a recent study that "the housing market appears to be more important than the stock market in influencing consumption." Beyond the psychological impact of the wealth effect, many homeowners have actually been borrowing against the increased value of their houses, further fueling consumer spending.

Some think we may now have a potentially dangerous housing bubble that could pop. Pessimists point to ominous statistics. In September, Morgan Stanley's Stephen Roach wrote that since 1997, housing prices had been growing three times as fast as rents, often a sign of an asset bubble. Kenneth Rogoff, director of research at the IMF, has found that housing prices are up nearly 30% since the mid-1990s (after adjusting for inflation), the strongest surge since 1970.

A host of other experts, however, including Chairman Greenspan, believe that housing prices are simply a reflection of underlying fundamentals: low interest rates, income growth, and rising demand for housing spurred partially by demographics and immigration trends. Whether or not these are signs that a bursting bubble awaits us, many analysts fear that a flattening of values or a sharp uptick in borrowing costs could drain the economy of housing's impressive support of consumer spending.

That's why the next few months of housing sales and price data will be important to monitor, as any flattening or declines in the housing market could be bad news for a still-fragile recovery. And even if sales as well as prices stay steady, don't expect the bump from housing that we have benefited from in the last two recoveries.

Data: The OFHEO's quarterly House Price Index is available at www.ofheo.gov/HPI.asp. New homes sales are reported by the Census Bureau at http://www.census.gov/const/www/newressalesindex.html.

Gene Sperling is a senior fellow for economic policy at the Council on Foreign Relations. He was director of the National Economic Council from 1997 to 2001, serving as President Clinton's top economic adviser.

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