How Housing Starts Will Prevent Obama from Being Another Reagan

Veteran readers know one of my favorite charts is to juxtapose housing starts vs. unemployment. I forgot how I ran into this particular chart or what compelled me to contrast the two, but many years ago I did, and what I found is that housing starts typical forecast unemployment by 6-18 months. Ergo, if housing starts tank, you can expect unemployment to spike within the next year and 1/2.

Though I could speculate, I do not know the precise reason why housing starts forecast unemployment so well. I do know, whether the correlation is spurious or not, it's been a pretty good predictor in the past which is why I wanted to revisit and update the chart. I also wanted to revisit the chart because this recession is different than most others (duuhhhh!) in that unemployment has remained stubbornly high. Instead of a traditional recession where (cough cough, WHEEZE WHEEZE) FREE MARKET FORCES are brought about to take advantage of lower labor costs and lower cost opportunities presented by recessions and bring about a SHARP drop in unemployment, this time around it has not happened as unemployment stalls above 9%.



The question is of course, "when will unemployment come back down?" and this chart tells us the answer;

Not any time soon.

Notice that housing starts have also stalled. Unlike recessions before, when housing tanks, but then quickly recuperates, this time around it has not only tanked, but stayed tanked. Housing is still down and out, and assuming the correlation between housing starts and unemployment holds, you can expect unemployment to be hovering around 9% for some time to come.

Now this is GOOD NEWS in some regards because many political pundits (lacking the super awesome economic genius I am gifted with) are worried that Obama will be like Ronald Reagan. Reagan during his first term had very low approval figures just like Obama, but then an economic boom occurred in the third year of his first term, vaulting him into a second term. Those of the right side of the political spectrum are worried this could happen with Barry.

However, that is unlikely to happen. If you look at housing starts under Reagan in both parts of the double dip recession/Volcker Recession, housing starts recovered immediately. Additionally, they never went below 800,000. In Obama's case, housing starts tanked to 500,000 and have consistently stayed down there for over 2 years.

Of course, I don't know why housing starts track unemployment so well. And I am nowhere near as "educated" as the likes of Christine Romer and Paul Krugman. But so far this chart is batting about .925 while Keynesian-addicts such as Romer and Krugman are batting at about .000.

So those of you on the political right need not worry. The economy is not going to recover in time and strongly enough to the point it will save Obama. More importantly though however, is that we should not be cheering on a moribund economy so we can defeat somebody for political gain. We should be cheering this on because it's simply going to be another metric ton of empirical evidence that socialism and Keynesianism does not work, and free markets and a free people do. Of course "tell them that."