Declines in real residential investment subtracted nearly 1 percentage point from the overall increase in real GDP in 2007. Even so, the inventory of unsold new homes remains unusually high, because the demand for housing has fallen about as rapidly as the supply. Problems in the subprime market have virtually cut off financing in this sector.
Should we have changed our expectation about export prices because over most of the last year the traditional relationship between export prices and the growth of our trading partners has broken down? Obviously we don’t think so, but the example is a good illustration of the difficulty of forecasting the economy even in “normal” times. And of course these are anything but normal times.