The Inflation Reduction Act and Residential Construction

And GDP Updates

Go! Go JPow! Go - Go - Go JPow!

Just slidin’ on in to the soft landing like a boss.

My position is that the US has a longstanding 5% NGDP growth trend. There was a one-time permanent drop from that trend in 2008, followed by 8 years of 4% growth. The low growth was associated with residential investment far below any previous range. Now that we have crawled our way back to within viewing distance of sustainable rates of home construction, we should assume that a 5% nominal growth rate is again appropriate until proven otherwise.

If we benchmark nominal GDP growth to a 5% trend from 2016, US nominal GDP is currently just 2.8% above trend. That is closer to trend than nominal GDP was in 2006. There was a brief period of volatility around the Covid shock, but NGDP growth has now hewed to 5% quite closely for 2 full years.

Figure 2 shows GDP trends since 2016 for real GDP, the GDP price index, and nominal GDP. There has been a one-time inflation bump of about 8%. Using the 5% nominal growth benchmark, a quarter of that is due to overshooting and three-quarters is due to the real GDP shock associated with Covid and its aftermath.

There is still quite a bit of normalization that has not happened. For instance, in the price of residential investment inputs. We are not completely recovered from the real Covid shock. So, I expect that if we continue down the 5% NGDP growth path, inflation will come in a bit below the 2% target over the next few years.

We could have dreamed of a better outcome, but we shouldn’t have expected one. JPow! has been amazing. There has been and will be no discernible decline in completions of new housing units through this period. America has no room left to give on housing supply, so this was very helpful to the cause of returning to a path of sustainable housing.

The IRA and Homebuilding

This is idle speculation. But, the persistence of post-Covid capacity constraints in residential construction has been patience-trying.

And, after seeing Joseph Politano point out the huge growth in construction of manufacturing facilities, I wondered, how much residential crowding out is due to construction being driven by the Inflation Reduction Act?

These sectors aren’t completely in competition for resources, but they are to an extent. And, again, just idle speculation, but the trends are sort of mirrors of each other since the IRA was passed in the summer of 2022.

Figure 1 shows total construction spending (black), total nonresidential spending (red), total manufacturing construction spending (a subset of nonresidential spending, orange), and residential (blue).

Blue dropped back as red and orange were taking off.

Figure 1

Figure 2 compares real fixed investment - again, residential blue and nonresidential red. Could this be the case, to an extent? And if it is, then is this more evidence of a coming surge of new residential capacity? Or is the Inflation Reduction Act just getting started, and capacity constraints will keep getting worse for residential construction for a while?

Or am I reading this wrong, and capacity constraints are from other issues, and in fact, residential investment was crowding out nonresidential construction?

Figure 2

I will say that price inflation in nonresidential and residential (relative to general GDP price inflation) doesn’t seem to confirm a crowding out story (or confirms the residential crowding out nonresidential). Residential input prices soared during the Covid spike, then leveled out (Figure 3).

Figure 3

Anyone with boots on the ground and opinions about this?

See: Addendum to this post.