by Bill McBride on 6/19/2010 09:02:00 PM
Saturday, June 19, 2010
An update on a theme ...
Click on graph for larger image in new window.
This graph shows single family housing starts and the unemployment rate through May (inverted).
You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.
Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. After rebounding a little in early '09, housing starts (blue) have mostly moved sideways.
This is what I expected when I first posted the above graph last summer. I wrote:
[T]here is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think ... a rapid decline in unemployment is also unlikely.Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This lead to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recovery.
Note: RI is mostly new home sales and home improvement.
However this time, with the huge overhang of existing housing units, this key sector isn't participating. So in this recovery there is less job creation, less household formation, and less demand for housing units than a normal recovery. This is sort of a circular trap for both GDP growth and employment.
Eventually the excess housing units will be absorbed - (progress is slowly being made, see Housing Stock and Flow) - but until then, this key sector will remain under pressure and I expect the recovery will be sluggish and the unemployment rate will stay elevated.