Tuesday, February 26, 2019

Housing is the Business Cycle

Connor Dougherty, a New York Times economics journalist, does a good job analyzing the role housing has played in past recessions and why it may not be so crucial in the next.  He writes that housing declines presaged all but two of the last eleven recessions.  

Housing starts are one of our best leading indicators.  Even in one of his two exceptions (the recessions of 1953-54 and 2001), housing starts did a credible job of predicting one, 1953-54, leaving only only 2001 as a real anomaly.  Starts led the 1953-54 recession by nine months and fell 11.3% peak to trough.  In 2001 housing starts peaked a month after the economy and led by a month at the trough.  Peak to trough they fell a mere 6.6%.

The "Greenspan put" did not save Dot.Com investors or IT workers, but did provide a soft landing for housing in 2001.   An Austrian might argue that simply made the ultimate housing bust worse six years later. 

Dougherty bases his anlysis on contributions to GDP from the the work of Edward Leamer.  The latter's prescient 2007 Jackson Hole address, "Housing is the Business Cycle," which emphasizes the importance of housing in recessions.