Residential Investment Held Back the U.S. Economy in the Third Quarter

  • Real Gross Domestic Product (RGDP) increased at a seasonally adjusted annual rate of 2.6 percent in the third quarter of 2022. In the second quarter real GDP decreased 0.6 percent.

  • Residential fixed investment decreased by 26.4 percent as new single-family construction and brokers' commissions fell. This was the largest reduction since the Global Financial Crisis. Residential investment fell 18 percent in the second quarter.

  • Consumer spending – which makes up more than two-thirds of GDP – moderated slightly but remained strong.

As the Federal Reserve continues to evaluate the appropriate pace and cumulative amount of tightening needed to bring down inflation, new data from the Bureau of Economic Analysis show the US economy grew in the third quarter after falling in the first and second quarter of this year. The moderation in consumer spending and contraction in the housing sector means the Fed's stance is successfully cooling the US economy.

Despite the economy's overall improvement, the housing sector showed more weakness in the third quarter, reflecting the challenges facing the housing market in recent months. Residential fixed investment – consisting of purchases of private residential structures – new construction, improvements to housing units, brokers' commissions on the sale of residential property and residential equipment – fell by 26.4 percent. It was the third consecutive decline in the measure, which historically has been very responsive to changes in interest rates. Residential fixed investment fell by 18% at an annual rate in the second quarter and 3.1% in the first quarter.

Another downtick in the measure wasn't entirely surprising, given recent developments in new home construction. Builder confidence has fallen for much of 2022 and housing starts were 7.7% lower in September than they were a year prior. New home sales were down 17.6% over that same period.

Historically, declining new construction and slumping residential investment have each acted as early-warning indicators of an economic downturn. If housing market activity continues to cool, further declines in residential investment are expected. Private inventory investment is also likely to fall further reflecting weakness in retail trade. Combined, economic growth could slow in the fourth quarter and will likely be weak over the next year.


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