U.S. Growth Is Heating Up

U.S. residential and non-residential investment will rebound from the depressed levels seen last year.


Residential investment was a drag on GDP growth for two quarters in 2016, which is unlikely to persist in 2017. The progress made on foreclosures since the financial crisis has driven housing inventory to its lowest level since the mid-1990s, meaning that housing supply no longer poses a headwind to construction. Further, demographics should also help boost the housing market during the next few years. According to the Joint Center for Housing Studies of Harvard University, over the next ten years, the aging of the millennial generation will boost the population in their 30s. The growth in this age cohort implies an increase of 2 million new households each year on average.

While rising mortgage rates will be a drag on housing at the margin, they will not pose a significant headwind to residential investment in 2017. At least so far, mortgage purchase applications have been resilient in the face of rising rates.

Non-residential investment was a small drag on growth in 2016, but this was largely related to depressed investment in the energy sector. Now that oil prices have recovered, non-residential investment should return to being a small positive contributor to growth. Our composite indicator of new orders also suggests that non-residential investment will trend higher this year.

The Odds Of March

Investors should fade the recent increase in expectations of a March rate hike by the Fed.


In the current cycle, the Fed has not lifted rates without having first guided market expectations in the months leading up to the hike. As can be seen in the above chart, rate hike probabilities implied by fed funds futures were already well above 50% one month prior to each of the last two rate hikes. If there was a strong desire to lift rates in March, Yellen would have likely sent a more powerfully hawkish signal in her testimony last week. Instead, Yellen chose not to mention the March meeting specifically and said only that the Fed would continue to evaluate the case for further rate hikes at its upcoming “meetings”.

Besides the lack of a clear signal from Yellen, still-low inflation and elevated policy uncertainty will keep the Fed on hold until June.