Recalculation in 2006-08; recession in 2008-10

Here’s a recent report on the housing markets in responsible cities that didn’t get swept up in the sub-prime mania:

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ “ said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. . . .

The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been.

The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis.  [emphasis added.]

This should be no surprise to readers who were following themoneyillusion back in 2009.

And speaking of being ahead of the curve, who was the one who argued back in 2009 that China was a powerful engine of recovery in the global economy?  And that the last thing we should be doing is pressing China into a highly deflationary policies such as immediately hiking the yuan by 25%?  China decided to take it slow, and raise the yuan gradually once its recession ended.  And here are the results of this pro-growth policy:

BEIJING (AP) — China’s exports surged in January in a sign of rebounding global demand and its politically sensitive trade surplus fell to a nine-month low, possibly easing pressure on Beijing to allow its currency to rise.

China’s global trade surplus fell 55 percent from a year earlier to $6.5 billion, customs data showed Monday. Exports soared 37.7 percent — more than double December’s rate — to $150.7 billion, while China’s strong domestic demand drove explosive import growth of 53.5 percent to $144.3 billion.

“Strength of exports, and even more so imports, points to solid demand — globally and domestically. The former bodes well for global recovery,” said Dariusz Kowalczyk, senior economist for Credit Agricole CIB in Hong Kong, in a report.  [emphasis added]

Remember all those xenophobic protectionists, the ones who insist China’s just a big mecantilist bully, which exports lots of stuff but closes its own markets to the rest of the world?  The ones who see the world as a giant zero-sum game?  I wonder how they’ll spin this trade number?

BTW, might we replace the word ‘sign’ in the first sentence with ’cause?’

PS:  It’s true that while US exports to China are soaring rapidly in percentage terms, they are still far smaller than imports.  We tend to export more to places like Latin America and Australia, where there is a boom in natural resources and the building of infrastructure to support resource development:

Owens adds about 65-percent of Caterpillar’s construction equipment sales last year were in emerging markets including China and Latin America.

But think about this:  Where do most of those natural resources go that are dug out of the ground in Chile and Peru and Brazil using Caterpillar equipment?

Employment in residential and nonresidential construction during the crash

There’s been a lot of response to my argument that the loss of residential construction jobs did not play a major role in the recession, rather falling NGDP was to blame.  Bob Murphy countered with some graphs showing the level of employment in construction was quite different from building starts (or building completions for that matter.)  But what matters is employment in residential construction, so lets break out the data by category.  I will simplify this BLS data by adding both construction workers and trade workers, since most of the employment on both residential and non-residential structures is trade workers.  (These two categories include the vast majority of all construction workers, the remainder are building infrastructure.)  Here are the totals in thousands:

Category              January 2006            April 2008        October 2009

Residential                3422                        2931                 2172

Non-residential         3204                        3436                 2771

Total                         6626                        6367                 4943

Un-rate                     4.7%                       4.9%                 10.1%

If you look at the total level of construction employment, you see that data that caused Bob Murphy to reject my hypothesis.  Although housing construction was down sharply by April 2008, total construction employment had fallen only slightly.  But that data has no bearing on my claim that the decline in residential employment contributed heavily to the recession.  We need to focus on residential construction jobs.

Even in the residential sector, it is true that jobs fell more slowly than construction activity.  But I’d still argue the data strongly supports my hypothesis:

1.  Almost 40% of the job loss had occurred by April 2008, yet the national unemployment rate remained relatively low.  Those workers mostly found jobs in non-residential construction, or other fields, or in a few cases returned to Mexico.

2.  In mid-2008, economic forecasters were predicting fairly low unemployment for the year 2009, even though they already knew that housing starts had fallen much faster than housing employment.

3.  In mid-2008 commercial real estate prices were still quite strong, despite the fact that residential housing had been declining for more than 2 years.  No spillover was expected.

4.  Then NGDP fell sharply after June 2008.  Even if there had been no pre-existing subprime crisis, one would expect a sharp break in NGDP to severely depress the housing industry.  Not surprisingly, it was after mid-2008 that prices began falling in non-subprime markets like Texas.  Surely a big portion of the post-April 2008 housing downturn was caused by the fall in NGDP.  Australia did not see a decline in NGDP, and did not see a housing crash in 2008-09, despite even more inflated prices.

5.  So nearly 40% of the job losses had little effect on the national unemployment rate, and a big portion of the remaining 60 % were almost certainly caused by the drop in NGDP.  How much of the rise in the national unemployment rate can be plausibly attributed to job losses in housing not attributable to a fall in NGDP?  I’d say well under one percentage point of the more than five percentage point increase in the unemployment rate.  What do you think?

HT:  Marcus

PS.  I can’t get the BLS link to work, they are series CES2023610001, CES2023620001, CES2023800101, CES2023800201.

Las Vegas: Is the problem structural or cyclical?

The short answer is both, but I think Tyler Cowen may underestimate the role of demand shocks:

 The article is here and it details other grim aspects of the city’s economy.  This is a simple yet effective example of the current non-separability of aggregate demand and structural problems.  Demand in Las Vegas is ailing and businesses are complaining of low sales.  Yet this is a sectoral shift as well, resulting from especially bad local housing problems, lower travel demand from outsiders, and a growing desire for investment safety rather than gambling risk.  Las Vegas needs for the United States to have higher real asset values, not just higher nominal aggregate demand.

Vegas suffered greatly after the sub-prime bubble burst in late 2006.  I agree with Tyler’s view than more nominal demand would not solve that problem.  But I think Tyler underestimates the role of falling AD in the hard hit Vegas tourism industry.  Sectoral shifts often occur gradually, as when tastes change over time.  The decline in Vegas tourism has been abrupt.  Admittedly an abrupt sectoral shift could occur if the underlying causal factor was sudden and dramatic.  Tyler argues that the sudden loss of wealth in America depressed the Vegas tourism market.  I agree, but think the wealth decline was mostly due to falling AD.

This data on Las Vegas tourism shows that 2007 was a record year for revenue (up over 5%) and number of tourists.  Hotel occupancy exceeded 90%.  Then tourism dropped off sharply in 2008 and 2009.  In my view the housing bust of 2007 destroyed relatively little wealth and had little impact on Vegas tourism.  In contrast, the sharp drop in AD in 2008 had a severe effect on tourism.  (High gasoline prices might have also hurt, but that problem quickly went away.)

I think Tyler errs when he implies that nominal demand and real asset prices are two different things.  The sudden stock market crash of October 2008 was not caused by housing problem, it was caused by sharply falling expectations of NGDP growth.  That’s an AD problem.  Remember, nominal demand affects real asset prices because wages are sticky.  This causes nominal shocks to have real effects on output, real stock prices, real commodity prices and real commercial real estate prices.

Unfortunately for Vegas, they rely heavily on the alpha males who form the entrepreneurial backbone of America.  Meek, mild-mannered teachers like me have sticky wages and do OK during recessions.  But we don’t do much gambling.  The brunt of the impact of lower AD falls on domestic businessmen (not multinationals), ranchers, developers, entrepreneurs, etc.   When they have a good year, they do what every red-blooded American male wants to do–go to Vegas and gamble.  But ever since the Fed adopted the tight money policy in 2008, they have not been doing well.

To summarize:

1.  Structural problems:  The first half of the Vegas housing crash

2.  Aggregate demand problems:  The second half of the housing price decline, the commercial property crash, the sharp fall in stock and commodity prices, and the fall in RGDP that began in mid-2008.

I’d guess that two thirds of Vegas’s problem is in the second category, and that if NGDP had kept growing at 5% then Vegas’s tourism industry would have only taken a modest hit.