Overhang has held down growth in investment in structures, say Cleveland Fed researchers

Investment in structures in the US is still 29 percent below its pre-recession peak. Using a new indicator of the level of structures that would be warranted by economic conditions, Federal Reserve Bank of Cleveland researchers Margaret Jacobson and Filippo Occhino find evidence that the level of investment in structures was too high in the first half of the 2000s. They say this overinvestment created an excess, or overhang, of structures which has held down the growth of investment in structures.

Structures include both residential buildings, such as homes and apartment buildings, and nonresidential buildings, such as factories, office buildings, stores, and hospitals. Jacobson and Occhino say elevated levels of structure overhang tend to be associated with the slow growth of investment in structures. To measure overhang, Jacobson and Occhino constructed a measure of the optimal level of structures that would have been warranted by economic conditions and growth prospects in each year from 2000 to 2012; they then compared the optimal level with the actual stock of structures. According to their measure, structure overhang in the private sector increased in the first half of the 2000s, peaking at 21 percent in 2006. It declined rapidly during the recovery, reaching 11 percent in 2012.

Looking at data for the real estate industry, which accounts for more than 60 percent of the stock of structures, the researchers find overhang peaked in 2006, and then dropped rapidly. For some cyclical industries, like manufacturing, retail trade, and finance and insurance, Jacobson and Occhino say overhang spiked during the recession, as those industries’ output declined, but then decreased during the recovery.

The researchers say their findings suggest that investment in structures may pick up further in the future, as the remaining overhang gets absorbed, but that it will not likely return to the high pre-crisis levels.

Read The Overhang of Structures before and since the Great Recession.

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Has the longer-term trend rate of inflation declined? Different approaches to measurement point to different answers, say Cleveland Fed researchers

The Federal Reserve has set a long-run objective for consumer price inflation of 2.0 percent. However, most measures of inflation in the US are running consistently below this objective. Has the longer-term trend rate of inflation declined? Federal Reserve Bank of Cleveland researchers Bill Bednar and Todd Clark say that three different approaches to measuring trend inflation point to three different answers: trend inflation has changed very little, it has fallen by a little, or it has fallen by a lot. The researchers say that, by any measure they have considered, recent inflation trends suggest inflation is likely to remain low in coming quarters.

Read Methods for Evaluating Recent Trend Inflation