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Friday, September 30, 2016

Another Look at Construction Gross Value as a % of GDP as of the 1st Half of 2016

Last September 16, 2016, we noted that Construction Gross Value (Construction GV) at 12.48% as of the first half of 2016 was at a 25 year high, eclipsing its peak value of 12.10% as of 1990.  The ratio was well above its historical average of 9.65% of GDP since 1990. As a result, there has been a sizable "overhang" of investment since 2009.

But the historical average of 9.65% is static.  It does not change with the business cycle.  But how would this trend look if it were more dynamic? If it moved in tandem with the business cycle?  How would this overhang look.

One way to build a long-term macroeconomic trend line would be to use the Hodrick-Prescott Filter that "would remove the cyclical component of a time series from raw data." The historical trend line, then, would be more dynamic and move with the business cycle. So, how would the above graph look with a more dynamic trend line? Would it still reveal a massive overhang or underhang?

The answer is: no. Because the trendline changes with the business cycle, the overhang is less pronounced.  Nevertheless, an overhang still exists.

Moreover, massive investment in construction that began since 2009 has eaten away at the cumulative underhang that existed since the mid 2000's but has only gone past equilibrium in 2016.  As of the first half of 2016, there is a cumulative overhang in construction of only 0.39%.

So, which is it? Has there been a massive overinvestment in construction? Only time will tell.

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