I recently made this argument:
Yes, housing output was low in 2009 and unemployment was high. But is there a causal relationship? I say no. Housing starts peaked in January 2006, and then fell steadily for years:
January 2006 “” housing starts = 2.303 million, unemployment = 4.7%
April 2008 “” housing starts = 1.008 million, unemployment = 4.9%
October 2009 “” housing starts = 527,000, unemployment = 10.1%
So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes. Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate. Then NGDP plummeted, and housing fell another 480,000.
Bob Murphy responded:
The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows. [he has a link here]
But more important,
Waaaait a minute. Note how Bob tells me housing starts are the wrong data, because construction workers keep working for some time after the starts, and then tells us to look at housing completions. But then he merely provides a link, moving right along to something “more important.” I wonder why? Perhaps because housing completion data also supports my view? Here are the numbers. I’ve also averaged the two, as the average of starts and completions might be a good indicator of ongoing activity.
January 2006: starts 2,303,000 completions 2,058,000 average 2,180,000
April 2008: starts 1,008,000 completions 1,014,000 average 1,011,000
October 2009 starts 527,000 completions 745,000 average 636,000
Using the housing activity average, an even greater share of the total slowdown occurred between 2006 and 2008, when unemployment was stable, and an even smaller share occurred after April 2008. I want to thank Bob Murphy for further strengthening my argument.
Bob also makes another argument, citing data showing that construction employment declined much less than housing construction between 2006-08. But that’s easy to explain, as commercial real estate prices didn’t peak until late 2008. So the commercial RE sector may have picked up some of the workers laid off from building houses. (I don’t know about infrastructure and government building.) And even if commercial RE didn’t add housing workers, if housing is half of all construction then a 20% decline in housing construction jobs would translate into only a 10% decline in all construction jobs. All this of course supports my point. The big drop in housing construction between January 2006 and April 2008 did not cause a significant impact on the US unemployment rate. Doesn’t that suggest that those housing construction workers weren’t able to find jobs in other forms of construction, or other activities?
BTW, economic forecasters knew about the drop in housing starts by April 2008. What sort of unemployment rate did they then predict for 2009? I’d guess not to high, which indicates economic forecasters probably agree with my view that the housing downturn was not likely to severely impact our unemployment rate.
By the way, commercial RE did eventually decline sharply, as you’d expect when NGDP falls at the fastest rate since 1938. But that’s not a re-allocation issue, it’s an AD issue. It does explain, however, why the sharp drop in total construction jobs did lag the sharp drop in residential construction activity.
Tags: housing bubble