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Monday, November 12, 2007

"After the Next Recession"

Robert Reich is looking past the next recession, Calculated Risk looks at residential construction employment, and Nouriel Roubini sounds the alarm:

After the Next Recession, by Robert Reich: All signs point to a recession... We may pull out of it, yet. Bernanke and company may make bigger cuts in interest rates. Congress may enact a payroll tax holiday on the first fifteen thousand of income, as I’ve urged.

But look beyond the business cycle and the consequences may be larger. For years now, America's middle class has lived beyond its paycheck. Middle-class lifestyles have flourished even though median wages have barely budged.

The reason is we’ve been able to borrow so much so easily. With housing prices rising, home equity loans have financed renovations and home improvements. With credit cards raining down like manna from heaven, we’ve bought plasma TVs, new appliances, vacations. With dollars artificially high because foreigners have held them even as the nation sank deeper into debt, we could summon cheap goods and services from the rest of the world.

But now, the era of easy money is over.

The housing bubble is bursting, and home equity is drying up. Credit card debt is next. Personal bankruptcies rose 48 percent in first half of 2007, likely even more in the second half – which means a wave of credit-card defaults. If you think the trillion dollars in sub-prime mortgage debt carried by big banks is large, think of the record nine hundred fifteen billion dollars Americans hold in credit-card debt. ...

The splurge is over, folks. As the days of easy money come to an end, what will America look like? Maybe we’ll see a recession in the short term, but more importantly over the long term: the American middle class will have a truer understanding of what it can and cannot afford; a truer sense of what’s really happened to its paychecks; and a more realistic view of where and to whom the economic gains of the last dozen years have actually gone.

Are we there yet? Calculated Risk (who now serves a full rss feed making it much easier to keep track of his posts) is keeping his eyes on residential construction employment for signs of trouble:

Residential Construction Employment Update, by Calculated Risk: According to the BLS, residential construction employment has only declined 6.5% from the peak employment in 2006 (221,900 fewer jobs). This is surprising because housing completions are off about 37% from the peak.


Click on graph for larger image.

This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions and residential construction employment were highly correlated, and Completions typically lag Starts by about 6 months.

The puzzle is why residential construction employment hasn't fallen further.

The following article from the Beaufort Gazette ... Housing meltdown hammers construction industry ... hits on two of the explanations for the residential construction employment puzzle: many workers have moved to commercial work..., and many workers are underemployed.

Other possible reasons for the employment puzzle are that the BLS has not correctly accounted for illegal immigrants working in the construction industry, and the BLS Birth/Death model might have missed the turning point in residential construction employment.

There is some merit to to all of these arguments, and I think the answer will be some combination of these explanations. The concern now is that if commercial construction spending slows, as appears likely from the recent Fed loan survey, then workers that have moved to commercial construction will have no work opportunities. ...

Then, there's Nouriel Roubini, who has little doubt about what's to come "The Coming US Consumption Slowdown that Will Trigger an Economy-Wide Hard Landing."

    Posted by on Monday, November 12, 2007 at 02:01 PM in Economics, Housing, Unemployment | Permalink  TrackBack (0)  Comments (32)

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