• The residential sector has lagged behind other Gross Domestic Product (GDP) components over the past year. In 2014 Q3, residential fixed investment only contributed .08 percentage points to overall GDP growth, according to the first estimate.
• During the recovery, residential investment has tended to be revised upward between the first and third estimates of GDP, with the quarterly rate of change averaging 1.1 percentage points higher.

Last week the Commerce Department released its first estimate of 2014 Q3 GDP.[1] The headline number was higher than expected, coming in at 3.5 percent versus a median forecast of 3.2 percent. But housing, traditionally one of the largest drivers of GDP growth, instead made one of its smallest quarterly contributions since the recovery began.

Residential fixed investment increased only 1.8 percent, down from an 8.8 percent increase in Q2 and its third-lowest increase since the recovery began in 2011 Q3. It contributed 0.08 percentage points to headline GDP growth, down from 0.27 percentage points during the previous quarter.

Residential investment typically leads the business cycle—it declines just before recessions begin, and increases just before recoveries start.[2] Early in the recovery, residential investment provided a strong boost to overall GDP growth, but its contribution has waned over the past year, with non-residential fixed investment largely pulling the load instead (see figure).

But there is reason for optimism. GDP data are revised twice in the two months following their initial release. Throughout the recovery, when comparing the first estimates of residential investment— commonly known as the “advance” estimate—to the final estimate published two months later, residential investment has tended to be revised upward.[3] Since 2011 Q3, the final estimate of residential investment has been higher than the advance estimate two-thirds of the time, with the quarterly rate of change averaging 1.1 percentage points higher.[4] (Over the longer history going back to the 1960s, quarterly rates of residential investment were revised upward just slightly more than half the time—essentially a coin flip—although positive revisions tend to be larger than negative ones.)

The second (“preliminary”) estimate of 2014 Q3 GDP is scheduled for release on November 25 and the third (“final”) estimate is scheduled for release on December 23. In light of the recent trends, there is a good chance that the change in residential investment in Q3 will be revised upward.

[1] Gross domestic product (GDP) is the sum of four components: consumption, investment, government spending and net exports. Investment can further be broken down into non-residential and residential fixed investment.

[2] Morris Davis and Jonathan Heathcote, “Housing and the Business Cycle,” Federal Reserve Board of Governors, November 2003.

[3] Data on GDP is published by the Commerce Department’s Bureau of Economic Analysis. To compare the successive vintages of GDP estimates, we use data published by the Federal Reserve Bank of Philadelphia’s Real-Time Data Set for Macroeconomists.

[4] Through 2014 Q2.