Commercial Building is a Weak Crutch

With residential building falling off a cliff, commercial building has been propping up regional economies around the country. Just this morning the WSJ featured an article about commercial construction supporting the economy in areas like Phoenix, Houston and Las Vegas. Unfortunately commercial building has historically been a weak crutch. First of all the commercial market just isn't as big as the residential one: "commercial construction can't offset all of the downdraft from weak housing. The residential market is much larger than the commercial market, and it plays a bigger role in the U.S. economy." Commercial construction has another weakness; it is dependent on financing and thus vulnerable to a liquidity crunch. If banks and other lenders start pulling back from all lending or if investors foresee rising defaults in commercial mortgage backed securities that could put a chill on the commercial construction boom.

The other thing worthy of note is that in a typical cycle commercial investment lags residential investment by roughly 5 quarters. In the graph below residential construction has been moved forward 5 quarters into the future. You may notice that residential investment has been falling over the last 5 quarters. Many predict that commercial market will soon follow, which would lead to a spike in unemployment and an increased chance of a rate cut.

Hat Tip: WSJ and Calculated Risk