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Sunday, January 04, 2009

New Home Sales and Unemployment

by Calculated Risk on 1/04/2009 07:54:00 PM

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New Home Sales vs. Unemployment Click on graph for larger image in new window.

This graph shows New Home Sales vs. the Unemployment Rate.

Here are a couple of things to note:

  • Usually New Home sales are declining before a recession.

  • Usually New Home sales bottom during the recession and start to increase 3 to 6 months before the recession ends. Therefore New Home sales are usually a good leading indicator of an economic recovery.

  • The unemployment rate usually starts increasing just before the recession begins.

  • The unemployment rate peaks after the recession ends. During the last two recessions, the unemployment rate didn't peak until over a year after the recession ended.

  • The unemployment rate typically lags New Home sales.

    As Dr. Yellen noted today (and Krugman and others before her) the current recession is not of the "garden-variety":
    I agree with [Martin Feldstein] that the current downturn is likely to be far longer and deeper than the "garden-variety" recession in which GDP bounces back quickly. As Marty points out, a defining characteristic of this downturn is its cause. Typically, recessions occur when monetary policy is tightened to subdue the inflationary pressures that emerge during a boom. This time, the cause was the eruption of a severe financial crisis. Cross-country evidence suggests that, following such an event, GDP remains subdued for an extended period.
    Since the cause of the current recession is different than other post WWII recessions, the dynamics of the eventual recovery might be different too.