by Calculated Risk on 9/28/2011 01:43:00 PM

From Boston Fed President Eric Rosengren: Housing and Economic Recovery

A few excepts and couple of graphs that highlight two topics we've discussed for years:

[E]even though residential investment is a small share of GDP (today only 2.2 percent), it is quite interest-sensitive – it can decline quite dramatically as interest rates rise, and expand quickly when interest rates are relatively low. So it has been a disproportionally important part of the monetary policy transmission mechanism.

In the current situation, however, U.S. mortgage rates are quite low but residential investment has not been the engine of growth that it normally is in economic recoveries. As shown in Figure 4, exports have been a source of strength in the first two years of the U.S. recovery, and business fixed investment has grown at approximately the same rate in this recovery as in the previous three. Yet the household sector has been particularly weak. Consumption, which accounts for approximately 70 percent of U.S. GDP, has grown only about half as much in the first two years of the recovery as it did in the previous three recoveries. And the shortfall for residential investment is even more striking. In the previous three recoveries, residential investment grew over 30 percent on average in the first years of the recovery – but has actually decreased in the first two years of this recovery. ...

CR Note: Residential investment (RI) is usually an engine of recovery, but with the huge overhang of existing vacant housing units, RI didn't contribute during the first two years this time. This is exactly what we've expected.

The weak housing sector also has an impact on employment. Figure 9 shows that far fewer jobs have been created in the first two years of this recovery (the left bar in each pair) than in previous recoveries (the right bar in the pair). In fact, construction jobs have continued to decline during the first two years of this recovery – we have lost over a half a million construction jobs since the recovery began. While construction employment is typically volatile during a recovery, on average the sector adds roughly 150,000 jobs.

Indeed, ... employment in construction has declined by 9 percent in the first two years of this recovery compared to growth over 4 percent during the previous three recoveries. And weak construction employment and activity also reduces the demand for labor in sectors that support construction.

CR Note: Employment is been especially weak in this recovery, and construction employment was especially hard hit. In addition to the excess housing inventory, there is excess capacity in most industries - and households have too much debt and are deleveraging.

The little bit of good news is that Residential Investment will make a positive contribution to growth this year (mostly from multi-family and home improvement), and construction employment will probably increase this year (not much).