I see that a lot of folks are getting depressed about the incoming data. I think this is unfortunate because the general narrative from the later half of 2011 is continuing. The economy looks to be growing reasonably well against headwinds that are likely to turn into tailwinds. Residential investment is flat and government spending declining.

Yet, it is highly unlikely that these trends will continue. We have not yet seen the increase in multifamily construction I was looking for and we may never see it. However, as predicted rents are rising, and the supply of housing is tight. If the multifamily supply doesn’t increase then this will cause either young homeowner, investors, or move-up landlords to soak up the inventory of single family homes and lead to an increase in the building of new single family homes.

Given the way things are going the next big trend might be move-up landlords. What we are imagining here are folks who are financially stable, who notice they can rent their existing home for enough to cover the mortgage. So, they buy a new home. Because they are moving into the new home they get to enjoy Fannie-Freddie owner occupied rates on both mortgages. Yet, they are now landlords on the original home.

Government spending has been declining strongly and this has dampened economic growth, but seems not only unlikely to continue but likely to reverse. In any case even stopping the drain from government would make the economy look a lot stronger.

Here is quarterly final sales growth in the US economy.

FRED Graph

Pretty spotty. However, here are final sales when we take out government.

FRED Graph

looks more like what you would expect from a generally strengthening economy.

We get an even more dramatic difference if we allow for consideration of inventory accumulation. I tend to prefer this since inventories are in fact quite pro-cyclical.

With government

FRED Graph

Without government

FRED Graph