The real problem is nominal: example #288

Here’s the latest on the housing sector, which has grown 82.5% in the last 3 plus years.

U.S. builders started construction on single-family homes and apartments in September at the fastest rate since July 2008, a further indication that the housing recovery is strengthening.

The Commerce Department said Wednesday that builders broke ground on homes at a seasonally adjusted annual rate of 872,000 in September. That’s an increase of 15 percent from the August level.

Applications for building permits, a good sign of future construction, jumped nearly 12 percent to an annual rate of 894,000, also the highest since July 2008.

The strength in September came from both single-family construction, which rose 11 percent, and apartments, which increased 25.1 percent.

Construction activity is now 82.5 percent higher than the recession low hit in April 2009.

Meanwhile RGDP is merely crawling along at a bit over 2%/year.  The problem isn’t housing!   How much more data do we need before the conventional wisdom changes?

It’s a pity the Fed won’t let the rest of the economy catch up with the zooming, booming housing sector.

The Fed should have listened to us market monetarists.  Instead they pursued an ultra-tight monetary policy in 2008 and the needed correction in housing spilled over and tanked the entire economy.


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13 Responses to “The real problem is nominal: example #288”

  1. Gravatar of Steve Steve
    17. October 2012 at 06:40

    http://video.cnbc.com/gallery/?video=3000114263&play=1

    CNBC is reporting labor shortages in the home building industry…

  2. Gravatar of Ritwik Ritwik
    17. October 2012 at 07:16

    Scott

    I’m curious to know, what combination of events will change your mind a little bit

    1) Towards the ‘supply’ view.

    2) Towards the ‘keynesian’ view.

  3. Gravatar of Doug M Doug M
    17. October 2012 at 07:28

    Hardly a booming and zooming housing sector. Construction activity is still 1/2 of its levels from 2007.

  4. Gravatar of Matt Tanous Matt Tanous
    17. October 2012 at 07:40

    “Instead they pursued an ultra-tight monetary policy in 2008”

    Bernanke has been running the printing presses the whole time. What is a “loose” monetary policy as compared to the rise in M2 since the recession hit (http://research.stlouisfed.org/fred2/series/M2/)?

  5. Gravatar of Bill Ellis Bill Ellis
    17. October 2012 at 08:16

    Up 82% from nothing… Big deal.

    We had 1,800,900 starts in 2006. We had a similar high rate of starts for decades. (2007 was a drop off at 1,355,000)

    It is like Scott is saying actual economic activity has no effect on the economy.
    It is like Scott is saying actual economic activity does not matter… that only monetary indicators matter.

    There is always a “cart/ horse” issue with macro. Monetarists always see money supply as the horse. No matter the issue… price level, inflation, employment, investment, bedbugs or growth… Money supply caused it.
    And they will force any economic issue into their mold no matter how much they need to twist and bend it.

    Keynesians know that the “horse” can come from anywhere in the economy.

  6. Gravatar of Bill Ellis Bill Ellis
    17. October 2012 at 08:23

    The real “housing issue” is the debt overhang.

    Are housing starts dependent on clearing that overhang? Are increased starts an indicator that the debt is being cleared ? Or are starts recovering despite a chronic debt overhang because of demographics ?

    If it is the latter than how much growth is being left on the table ?

  7. Gravatar of ssumner ssumner
    17. October 2012 at 10:04

    When you are talking about RGDP growth rates, what matters is the growth rate of housing, not the levels. Some commenters seem confused by the difference between levels and growth rates.

  8. Gravatar of ssumner ssumner
    17. October 2012 at 10:13

    Ritwik, Supply side conversion? Very fast NGDP with not much RGDP.

    Keynesian? The Fed buys up $15 trillion in bonds, ends IOR, and and sets a higher NGDP target, level targeting, and NGDP growth stays low.

    BTW, I am both a moderate supply sider and a market monetarist. I do think we have structural issues.

  9. Gravatar of Tommy Dorsett Tommy Dorsett
    17. October 2012 at 10:20

    Scott, agreed, BUT: if recovering housing helps to take pressure off V (remember velocity peaked in 2006 when home prices started falling) AND open-ended QE boosts M, we should get more NGDP. Even if its 5% pa instead of 4% pa, that would be meaningful. In short, positive shocks may help the Fed ease, just has negative shocks caused them to over-tighten. Bernanke has implied a higher tolerance for inflation if there is evidence of slack. Thus, they likely won’t lean against positive shocks and are actually leaning into them as inflation breakevens were higher when QE3 went off relative to QE2 and QE1.

  10. Gravatar of Doug M Doug M
    17. October 2012 at 13:43

    “When you are talking about RGDP growth rates, what matters is the growth rate of housing, not the levels. Some commenters seem confused by the difference between levels and growth rates.”

    What is your point? Construction employment was 8 million people in 2007, and is 5.5 million today. So, for the 2 million net job losses since 2007, 2.5 million of them were in construction.

    And, I don’t even think that housing / construction is all that important. Construction was important in the 2005-2007 growth story, and it imploded. It is was somewhat important in the 2008 downturn, but but not as important as the collapse of the fincial sector. And, and housing has been insignificant in the 2009-2012 recovery.

    Okay, so housing / construction has bottomed, but it is still anemic. It is niether driving nor restraining GDP growth.

  11. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 19:34

    ssumner:

    It’s a pity the Fed won’t let the rest of the economy catch up with the zooming, booming housing sector.

    The Fed should have listened to us market monetarists. Instead they pursued an ultra-tight monetary policy in 2008 and the needed correction in housing spilled over and tanked the entire economy.

    The Fed CAN’T guarantee that the whole economy booms together at the same rate, no matter what the aggregate inflation target happens to be. Aggregate inflation targeting still has inflation induced micro-level effects.

    Market monetarists should have listened to Austrians. Instead, they keep making claims about the Fed and the economy as if inflation affects all industries equally, as if the lack of booms in other sectors somehow implies that there is not enough inflation.

    The very fact that there are booms in only some sectors shows that there is too much inflation. A healthy market would see an expansion in all sectors, gradually over time. Bubbles arise due to the fact that inflation does not affect all things the same way.

    The reason why housing is booming so much more than other sectors is in large part because of the Fed’s ZIRP. Different sectors have different sensitivities to interest rates. A constant NGDP growth can be associated with setting nominal rates above or below “natural” rates, and result in distorted relative spending and prices, which of course affects the real side of the economy in terms of labor and resource allocation, and this just so happens to result in physical unsustainability!

    It is truly remarkable to witness Sumner looking at the housing market, observe a 82% increase in just 3 years, and rather than saying to himself “Gosh, we had a very unhealthy housing boom even with constant NGDP growth leading up to 2007, maybe this latest housing boom is unhealthy as well, and maybe the Fed is to blame again”, no, he completely ignores history, and he ignores Austrian theory, drinks the “inflationary booms are good” Kool-Aid, and says “Gosh, the housing market boom is great! If only Bernanke can do to other industries as what he is doing to housing! I know! More inflation! That ought to eliminate the radical difference in booms!”

    Unbelievable.

    Thank heavens Sumner and other “I don’t have a theory for booms” market monetarists don’t have any power over the money printing press. They would do so much more damage to a weakened and currently weakening economy than Bernanke is already doing.

    Inflation does not affect all industries equally. This is a fact that market monetarists need to learn. Talking about aggregates all the time doesn’t mean that inflation starts to actually only affect aggregate spending and prices, and cease affecting relative spending and relative prices.

    A constant NGDP growth can result in too much relative spending in one sector and not enough spending in another sector, which will require a lack of inflation to correct (which means no more NGDP targeting).

    No investor cares about NGDP. They cannot correctly allocate capital and labor when the market price information needed to do that is absent.

  12. Gravatar of Saturos Saturos
    17. October 2012 at 20:27

    Meanwhile some economists are predicting the end of growth: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/is-the-stationary-state-coming.html

  13. Gravatar of ssumner ssumner
    18. October 2012 at 05:17

    Doug, You are committing a basic error, confusing total construction and housing construction. I’ve addressed this 100 times. Non residential construction did fine during the Great Housing Crash of January 2006 to April 2008. The so-called “bubble” was in housing, not commerical. Commercial only turned down when NGDP tanked.

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