Is Housing the Business Cycle, 2019?

In 2007, Ed Leamer presented “Housing is the business cycle” at Jackson Hole. In 2018, Leamer himself doesn’t think a recession is imminent, but the following graph certainly gives one pause for thought.

Figure 1: Year on year growth in real residential investment (blue), and in housing starts (red), calculated as 4 quarter log differences. NBER defined recessions shaded gray. Orange denotes Trump administration. Source: BEA 2018Q3 3rd release, BuCensus/HUD, NBER, and author’s calculations.

Well, we have not broken through the 0.4 percent decline in civilian employment over six months Leamer used as a threshold, so for now (or as of November), we can rest reasonably assured that we’re not currently in a recession.

7 thoughts on “Is Housing the Business Cycle, 2019?

  1. pgl

    His opening made me laugh for reasons I’ll explain in a moment. His reluctance to consider the role of basic theory is very telling. He notes we have had 10 recessions since WWII attributing the 1953 recession to the end of the Korean War and the 2001 recession to the end of the Internet boom.

    Is he saying the CAUSE of the rest of the recessions is some exogenous fall in housing investment? If so, I wonder how he passed his first course in economics. Maybe the cause was an increase in real interest rates for some of these recessions with one of the effects being a decline in residential investment. Short of like distinguishing between a movement along a demand curve versus a shift in the demand curve. Yes Ed Leamer is not a macroeconomist.

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  2. pgl

    Greg Mankiw asks four questions for the new year:

    https://www.nytimes.com/2018/12/28/business/four-questions-for-the-year-ahead.html

    One had to do with Federal Reserve policy. One had to do with the trade wars. I suspect our host will be interested in the first two.

    The third sensibly notes we should pass a carbon tax. While Mankiw goes off the right wing deep end by blaming Social Security for the deficit, at least he has decided that the carbon tax revenues could fund government spending and not just more tax cuts for the rich.

    Now the last part of this was bizarro. Hassett is a fine economist? He’s an economist but says a lot of goofy things. Kudlow is also a good economist? Now that made me laugh out loud!

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  3. dwb

    I think people see what they want to see in this chart. I see at least one recession (2001) not preceded by a housing downturn. The 1970 downturn was not a 0.4% decline, and 1990s downturn of .4% was simultaneous or too late in the recession to be predictive. Even for the 2008 recession, the decline of 0.4% was far too late to be predictive. NBER gets the benefit of hindsight and a variety of indicators when calling recessions as well.

    Housing is sensitive to credit and monetary conditions: When financial conditions tighten, residential investment declines. Tight financial and monetary conditions may also lead to a recession. In that regard, I am far more interested in financial conditions: 10/2 US Treasury spread, credit spreads, etc.

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    1. pgl

      “Housing is sensitive to credit and monetary conditions: When financial conditions tighten, residential investment declines. Tight financial and monetary conditions may also lead to a recession. In that regard, I am far more interested in financial conditions: 10/2 US Treasury spread, credit spreads, etc.”

      All good macroeconomists would agree with this. But Leamer told us he does not waste his time with economic theory as he just mines data for meaningless correlations. So much more fun I guess.

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  4. pgl

    Kevin DOW 36000 Hassett made another incredibly stupid comment:

    https://talkingpointsmemo.com/news/kevin-hassett-apple-not-alone-china-trade-war

    Let me note what he got right:

    White House economic adviser Kevin Hassett said Thursday that “it’s not going to be just Apple” that faces revenue shortfalls as a result of the trade tensions initiated by President Donald Trump between the United States and China. “It’s not going to be just Apple,” Hassett, the chairman of the Council of Economic Advisers, said. “I think that there are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China.

    Bloomberg News has more:

    https://www.bloomberg.com/news/articles/2019-01-02/asian-stocks-to-be-hit-by-apple-sales-outlook-markets-wrap

    So what is head scratching from Hassett?

    “And I think that that puts a lot of pressure on China to make a deal.”

    WTF? U.S. companies seeing their sales, profits, and stock values decline will pressure the Chinese government to cave??? What is Kevin smoking.
    Oh wait – I get it. Trump is doing what he can to crash the stock market as part of some genius plan to get the Chinese to cave in. That must be it. Maybe Kudlow can explain how this all works!

    Reply
    1. baffling

      i wondered the same thing about hassett’s remarks. these guys live in a bubble where they can rationalize anything. hassett came across as saying we will continue to hammer us companies working in china until the chinese capitulate to our trade demands. he may not have meant this, but this is what the idiot conveyed to the public. another market glitch today, i guess.

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