Title: Residential construction activity and recession predictability
Authors: Andre Anundsen - Norges Bank (Norway) [presenting]
Knut Are Aastveit - Norges Bank (Norway)
Abstract: The aim is to assess the importance of residential investments in predicting economic recessions for an unbalanced panel of 12 OECD countries over the period 1960Q1-2014Q4. Our approach is to estimate various probit models with different leading indicators, commonly used in the literature, and evaluate their relative prediction accuracy using the receiver operating characteristic (ROC) curve. As a main result, we document that residential investments contain information useful in predicting recessions both in-sample and out-of-sample. This result is robust to adding typical leading indicators, such as the term spread, stock prices, consumer confidence surveys and oil prices. It is shown that residential investments are particularly useful in predicting recessions for countries with high home-ownership rates. Finally, in a separate exercise for the US economy, we show that the predictive ability of residential investments is robust to employing real-time data.