Wednesday, October 10, 2007

How Housing Predicts Unemployment

I noticed a while ago whenst correlating charts on a Saturday night that housing starts and unemployment more or less form a double helix...well, as best a double helix that's ever been formed in economics.

But what I particularly noticed was how housing prices predicated unemployment. Specifically when housing starts tank, unemployment usually peaks 6 months to a year later.

The reason would be that housing starts not only reflect 2-4 months of construction spending whilst the structure is being built, but 2-4 years consumer spending whilst the new owners furnish the building with furniture, drapes and X-Box 360.

There has been the occasional instance where housing starts tanked and unemployment did not increase. But that is the minority of the time.

Fun times ahead.


Anonymous said...

Seven per cent unemployment also means ninety three per cent employment.

Anonymous said...

The glass is 7% empty, not 93% full.

Freaking optimists.

Captain Capitalism said...

Ryan, I salute you.

So what would your take be on my theory that 3% RGDP growth sucks and that most countries, regardless of how advanced they are, should be able to pull off at least 7% without inflation due to creation, innovation and hard work?

Anonymous said...

I can see that. A country doesn't have to be twice as productive to have twice the GDP growth on an annual basis; they just need to beat their maintenance costs by a slightly larger margin. I can't think of the proper terms here, so forgive me.

Suppose that 20% of annual production goes towards replacing capital that has outlived its usefulness. To simplify things, lets just assume that productivity is directly correlated with capital accumulation, which is close enough to true anyway. A country that produces 23% of its existing capital stock in a year would experience 3% annual GDP growth if they didn't change their spending habits. A country that produced 27% of its existing capital stock would have 7% annual GDP growth. The country that grows more than twice as fast isn't all that much more productive; small things turn into very large differences, especially if they are maintained over a long period of time.

Of course, things are a lot more complex than that, and the 20% figure was pulled from thin air since I have no idea how much of our productivity goes towards replacing outdated/obsolete capital. My point is that a country doesn't have to be twice as productive or twice as efficient to have double the GDP growth. They just need to beat the minimum level of productivity required to maintain their capital stocks by a little bit more, and that kind of growth is easy.

The problem, I think, is that governments divert resources away from their most productive uses. The more government spending and intervention there is, the harder it is to add to the capital stockpile. Suppose that the US government only wasted 10% of its budget (a dream, I know), and then suddenly eliminated this waste. Given that the government on all levels spends about a third of GDP in the US, that would give us an extra 3% right there. In reality, I have no idea what percentage of the budget is wasted by the US government; I'm inclined to think it's probably a lot more than half. The key to fantastic economic growth in the US is to reduce the control that the government has over resources, either directly through taxes or indirectly through regulation.

Some would argue that countries like Ireland grow faster than their neighbors because their lower taxes and lighter regulations draw capital away from other countries. That's partially true; Ireland does get a lot of investment that probably would go elsewhere if not for the differences in regulations that make Ireland more attractive. On the other hand, if other places had the same economic freedoms that Ireland has, then everybody would be far more productive. The capital pie would be larger to begin with.

Padmanaban said...

That’s right. Unemployment is increasing day by day. Though there are job openings but still the case is very worse, since the companies are selective, and depending on the need, they take their time in finding the right candidate.
There should be some changes to be taken effect in the education system.