Did that title get your attention? Its barely an exaggeration:
We’ve discussed — quite extensively — how stimulus driven this economy has been. Starting with the initial jolt ("The Frankenstein Economy"), the government then moved to throwing everything they had (but The “Kitchen Sink”) at the Economy; all this in the context of a Post-Bubble environment.
The problem with stimulus, regardless of your economic philosophy, is what happens when that stimulus fades away. Things slow down — and worse.
Which brings us to the present "soft patch." Placing that into context is Asha Bangalore of Northern Trust. Banglore makes the intriguing observation about the private job creation between the end of the recession and the beginning of the rate tightening cycle:
"Residential investment outlays have made a sizable contribution to the growth of real GDP in the current business expansion and sales of new and existing homes have soared to set new records. The future of the housing market is tied to employment conditions in the economy. The sluggish performance of payroll employment is the primary reason for the FOMC to take a measured path toward bringing the federal funds rate to a neutral level. At the same time, the performance of the housing market has played a visible role in payroll growth. Employment in housing and related industries (sum of employment in the establishment survey under various categories related to housing industry) accounted for about 43.0% of the increase in private sector payrolls since the economic recovery began in November 2001. The Fed began raising the federal funds rate in June 2004. During the June 2004 and April 2005 period, housing and related industries have accounted for 13.0% of private sector payrolls. The point I am trying to make is that a cooling off the housing market will have an impact via fewer new jobs in addition to other adverse effects. The number of job losses could be significant given the role the housing sector has played in the current recovery."
From 2001 to last month (April 2005) 43.0% of private sector jobs are housing related. That’s astonishing. As if that’s not enough, consider what happened once the Fed began tightening:
Real Estate Jobs (post recession)
click for larger chart
Once the Fed began raising rates (June 2004 to present), Real Estate related job creation plummeted 68.2%! During the post-recession – pre-tightening period (11/01-6/04), about half of allt the new priate sector jobs were housing related.
In yesterday’s column ("Don’t Buy the Housing Bubble Propaganda"), I noted how this could all end badly:
"The last, and in my opinion, potentially most damaging factor, is the employment situation. As long as most people are gainfully employed, they will be able to service their mortgage costs. (For those of you who are buying a home you can barely afford, then let me suggest buying mortgage insurance — just in case your main income source falters).
The biggest risk to the housing market is not just rising interest rates — rather, it’s a significant decrease in national employment. Why? It’s not the leverage, but the ability to service the debt that causes problems. A potentially negative scenario is the Fed tightens too far, inducing a recession. Something else goes wrong – theoretically, China stops buying our Treasuries, and that forces the Fed to become a buyer of last resort (think Bernanke’s printing press). Next thing you know, we have hyperinflation, large-scale unemployment, and a housing market off 50%."
I thought this scenario was in the realm of possibility — but not necessarily the most likely outcome. Bangalore’s data suggests it may be more likely than I originally believed.
Economic Stimulus, Anyone?
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What does all this mean? Barring a sudden rise in organic job creation over the next 6 to 9 months, this cycle will have run its course — my guess is late 2005/early 2006.
And that’s not good for anyone.
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Hat tip to Gary Evans!
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Source:
Housing Market – Another Information Tidbit
Asha Bangalore
The Northern Trust Company, May 23, 2005
http://www.northerntrust.com/library/econ_research/daily/us/dd052305.pdf
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Barry, I tip my hat to you and retort.
http://naybob.blogspot.com/2005/05/housing-bubble-related-jobs.html
Half of New Jobs Are Real Estate Related
As if you didn’t have enough evidence of a real estate bubble, along comes these stats showing that Half of New Jobs Are Real Estate Related. If that isn’t a sure sign of a bubble, I don’t know what is.
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Not to quibble, but when I worked up a similar analysis, I actually calculated a little over 50% for housing related private sector jobs for the same time period – so your post title might be more accurate than you think! (As compared to Asha Bangalore’s 43%)
http://angrybear.blogspot.com/2005/04/after-housing-boom-impact-on-economy.html
Also, FED Vice-Chairman Ferguson’s comments on housing were interesting today:
http://www.federalreserve.gov/boarddocs/speeches/2005/20050527/default.htm
“… these assets are the most widely held by the general public, price changes, even when not exceptional, can significantly affect the macroeconomy. Rising asset prices support household consumption, whereas falling asset prices damp consumption. In a scenario of collapse, the damage to balance sheets and private wealth could go as far as undermining the soundness of the financial system and threatening stability of the real economy.” Federal Reserve Vice-Chairman Roger Ferguson, May 27, 2005
Best Regards!
Barry:
I’ve been away for a while, but have really been impressed by the quality of the handful of new posts I’ve looked at. This is good quality editorial material.
I think on housing we have to look at key markets, they are big enough to slam the nation if they fall. In Saan Francisco demographic trends don’t explain, the population has fallen, this is true of a number of other cities in the bay area.
Also in that region a huge percentage of loans (I believe over half) are no down payment with a significant percentage being interest only. Unless interest rates can be held steady for years people who are not saving are going to get hit at a time of reckoning a few years down the road.
They are told “you can’t lose” in real estate, it must go up. Everyone from the agents to the banks seem to believe that this is the case, it’s a magically money making machine, you don’t need fiscal pridence because even if you pay 50% of your wages on negative interest loan, then the appeciation will make you rich.
And then there is the increasing level of speculation.
Now I don’t care if the bubble markets are only 20% of the housing market, and the numbers avwerage out. These are still the enterprise producing regions. They are the hotbeds of entrepeneirship. Economic growth starts in these places, then when the new companies reach a certain size they start moving production to cheaper zones. So any decline is going to have a deproportionate impact.
In the medium term this might be good, it might reopen these regions to start ups without the a huge stash of cash, but inbetween it might ripple. There could be panics. So much is psychological.
Bubble, Bubble, Toil and Trouble
I keep having the same conversation over and over again these days about the existence of a real estate bubble, and when — and if — it will burst. The short answer is, of course, that I have absolutely no idea. But periodically I read interesting t…