Construction jobs are a big part of how housing recovery lifts the broader economy. But the construction rebound, so far, appears to be jobless. “Residential construction” jobs, as reported by BLS, were up just 1% in December 2012 from their lowest level since the housing bubble burst – even though new home starts in December 2012 were twice as high as their low point in 2009. Overlaying residential construction employment (monthly, in thousands, left axis) and construction starts (monthly, in thousands, right axis) data suggests a jobless housing recovery, with jobs struggling to turn around even as starts climbed sharply in 2012:
Click on graph for larger image.
Who is building all these new homes? If starts are now twice their lowest level, why aren’t residential building jobs also twice their lowest level, instead of up just 1%? The answer: this is the wrong way to look at construction jobs. It turns out that construction employment is approximately where it should be for the current level of construction activity. Here are three reasons why:
“Starts” aren’t the right measure of current construction activity. Units “under construction” is more relevant – especially now. The amount of construction activity this month depends not only on this month’s construction starts but also on construction starts in previous months. That’s because single-family construction takes 4-6 months between start and completion, and multi-unit-building construction takes 10-14 months, on average. Therefore, construction starts indicate what will happen to construction activity in the coming months – not necessarily where it is today. And, in this recovery, multi-unit buildings are an unusually high share of overall construction activity, so the typical new unit is under construction for longer, making starts an even-worse-than-usual proxy for current construction activity. Instead of starts, units “under construction” – also reported monthly by the Census – is the right measure of construction activity to compare with jobs. This changes the picture dramatically: while monthly starts in December 2012 were up 100% (that is, have doubled) since the bottom, monthly units under construction were up 32% from the bottom.
The “residential building” jobs category understates growth in residential construction jobs. The BLS “residential building” category covers general contractors and construction management firms but not subcontractors, which are covered under another category the BLS tracks, “residential specialty trade contractors.” Importantly, residential construction jobs have been shifting steadily from general contractors to specialty trade contractors throughout the boom, bust, and recovery, so the narrower “residential building construction” category understates recent growth in construction jobs. “Residential building” jobs in December 2012 were up just 1% from the bottom, while “residential specialty trade contractor” jobs were up 4%. The combined series is up 3% from the bottom. Of course, some construction workers might not be officially counted if they’re off the books, and others might work on both residential and non-residential projects and not fit neatly into one reporting category. Still, looking at both the “residential building” and “residential specialty trade contractors” gives a clearer picture than looking only at “residential building.”
Construction jobs do not move one-for-one with construction activity. Looking at the right measures over time – units under construction and the sum of the two jobs categories – jobs move up and down less than construction activity does. For every 10% increase (or decrease) in the number of units under construction, construction employment increases (or decreases) by a little more than 4%. One reason might be what economists call “labor hoarding” – firms hold onto more workers than they need in temporary downturns if the cost of firing and re-hiring is high relative to keeping them on. Therefore, firms might increase or reduce workers’ hours instead of hiring or firing. Another reason is other construction activities, like remodeling, might move differently with the business cycle than new construction and possibly even soften the ups and downs of demand for construction workers.
Overlaying these two series – “units under construction” (Census) and the sum of “residential building construction” and “residential specialty trade contractors” (BLS), we get:
Using these measures, jobs track construction activity pretty closely, with a slight lag. Taking this lag into account, a simple time-series model suggests that construction employment is now just 2% lower than it should be for the current level of construction activity.
The picture might change tomorrow in the January jobs report. As part of tomorrow’s report, the BLS will release its annual benchmark revision of previously reported employment figures. The preliminary revision announced in September suggested that employment for construction overall (including non-residential) would be revised up 1.6% for the benchmark month (March 2012). If tomorrow’s official revision to residential employment is in that range, the jobless construction recovery might not be missing any jobs at all.
What does this mean for construction employment in 2013? Suppose starts rise another 20% in 2013 relative to 2012 – a bit slower than the 28% increase in 2012 relative to 2011. Recent trends suggest that the number of units under construction should be a hair over 20% higher in December 2013 than in December 2012. Even though units under construction didn’t grow as fast as starts in 2012, much of the effect of the increase in starts in 2012 will be on construction activity in 2013, not in 2012. As a result, construction jobs – residential building plus residential specialty trade contractors – could grow 8% in 2013. The sharp increase in construction starts in 2012 should mean more construction jobs in 2013.
Well that didn't last long. After topping 50% for the first time since February, bullish sentiment dropped back below 50% last week. According to the weekly survey from the American Association of Individual Investors (AAII), bullish sentiment dropped from 52.34% down to 48.04%. In spite of the drop, though, bullish sentiment is still high enough to rank as the third highest weekly reading in the last year.
Workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance.
This suggests that people are motivated not so much by the cold cash nexus as by feelings of reciprocal fairness...
Project Syndicate: Across the North Atlantic region, central bankers and governments seem, for the most part, helpless in restoring full employment to their economies. Europe has slipped back into recession without ever really recovering from the financial/sovereign-debt crisis that began in 2008. The United States’ economy is currently growing at 1.5% per year (about a full percentage point less than potential), and growth may slow, owing to fiscal contraction this year.
Industrial market economies have been suffering from periodic financial crises, followed by high unemployment, at least since the Panic of 1825 nearly caused the Bank of England to collapse. Such episodes are bad for everybody – workers who lose their jobs, entrepreneurs and equity holders who lose their profits, governments that lose their tax revenue, and bondholders who suffer the consequences of bankruptcy – and we have had nearly two centuries to figure out how to deal with them. So why have governments and central banks failed?
There are three reasons why the authorities might fail to restore full employment rapidly after a downturn.
(I) For starters, unanchored inflation expectations and structural difficulties might mean that efforts to boost demand show up almost entirely in faster price growth and only minimally in higher employment. That was the problem in the 1970’s, but it is not the problem now.
(II) The second reason might be that even with anchored inflation expectations (and thus price stability), policymakers do not know how to keep them anchored while boosting the flow of spending in the economy.
And here I stop, flummoxed. At least as I read the history, by 1829, Western Europe’s technocratic economists had figured out why these periodic grand mal economic seizures occurred. That year, Jean-Baptiste Say published his Cours Complet d’Economie Politique Pratique, admitting that Thomas Malthus had been at least half right in arguing that an economy could suffer for years from a “general glut” of commodities, with nearly everybody trying to reduce spending below income – in today’s jargon, to deleverage. And, because one person’s spending is another’s income, universal deleveraging produces only depression and high unemployment.
Over the following century, economists like John Stuart Mill, Walter Bagehot, Irving Fisher, Knut Wicksell, and John Maynard Keynes devised a list of steps to take in order to avoid or cure a depression.
Don’t go there in the first place: avoid whatever it is – whether external pressure under the gold standard, asset-price bubbles, or leverage-and-panic cycles such as that of 2003-2009 – that creates the desire to deleverage.
If you do find yourself there, stop the desire to deleverage by having the central bank buy bonds for cash, thereby pushing down interest rates and flooding the zone with liquidity so that debt issued by those buying or directly buying currently-produced goods and services becomes more attractive than holding liquid cash and so boost economy-wide spending.
If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market; this, too, will make buying the debt issued by those buying currently-produced goods and services (including the government) more attractive and so boost economy-wide spending.
If that fails, stop the desire to deleverage by promising to print more money in the future, which would raise the rate of inflation and make holding cash less attractive than spending it, thus inducing people to purchase the newly-issued debt of those who want to buy currently-produced goods and services and so boost economy-wide spending.
In the worst case, have the government step in, borrow money, and buy stuff directly, thereby rebalancing the economy by leveraging up as the private sector deleverages, and so eliminating the spending shortfall.
There are many subtleties in how governments and central banks should attempt to accomplish these steps. And, indeed, the North Atlantic region’s governments and central banks have tried to some degree. But it is clear that they have not tried enough: the “stop” signal of unanchored inflation expectations, accelerating price growth, and spiking long-term interest rates – all of which tell us that we have reached the structural and expectational limits of expansionary policy – has not yet been flashed.
(III) So we remain far short of full employment for the third reason. The issue is not that governments and central banks cannot restore employment, or do not know how; it is that governments and central banks will not take expansionary policy steps on a large enough scale to restore full employment rapidly.
And here I reflect on the 1930’s, and on how historical events recur, appearing first as tragedy and then, pace Karl Marx, as yet another tragedy. Keynes begged the policymakers of his time to ignore the “austere and puritanical souls” who argue for “what they politely call a ‘prolonged liquidation’ to put us right,” and professed that he could “not understand how universal bankruptcy can do any good or bring us nearer to prosperity.”
Today’s policymakers, so eager to draw a bold line under expansionary measures, should pause and consider the same question.
Okay, look. If Obama doesn’t now, finally, explain Keynesian economics to the general public, using actual facts--such as the reason for the economic contraction--and point out that Boehner & Co. either are ignorant of the facts or are willing to deliberately misinform the public about such a critically important matter, then he should resign and let Joe Biden explain it as president.
I mean it.
Obama did a stellar job a week before his inaugural address explaining the debt ceiling law and what “raising the debt ceiling” means--and that ti does not mean what the Republicans’ campaign of disinformation was saying it means. He should do the same now, on this.
Presumably, he’ll enlist as his chief speechwriter for his State of the Union address a speechwriter who understands how to easily explain Keynesian economics and the current “contraction” statistics. But, just as with his inaugural address, he should not wait until that speech to expose the Republican game plan for what it is: a concerted campaign to misinform the public about critical facts, knowing that the public will not know the accurate specifics, and aware that--as Thrush says, outright--the mainstream press will not sufficiently (or at all) apprise the public of those fact.
In other words: that Romneyism--the flagrant lying, con artistry, as the chief modus operandi--is now at the very heart of what the Republican Party is.
The public did catch on to Romney by the fall. And, thanks largely to Obama’s statements at his press conference on Jan. 14 abou the debt ceiling, they caught on to that, as well. And if Obama makes an effort to explain to the public basic Keynesian economics, and cites actual facts, actual statistics, about the fourth-quarter contraction, they’ll catch on this time, too. And, maybe, finally, to the fact that the Republicans have decided upon a strategy of fraud in order to disassemble the social safety network, including Social Security and Medicare.
In his State of the Union address, he’ll have an opportunity to finally educate the public about the actual causes of the Greek meltdown, of the actual effect of Tory austerity in Britain, of the actual cause of economic near-collapse in Spain, in Italy, in Ireland, in Iceland--and of the actual effect of the safety net in Germany, in Holland, and elsewhere. And maybe he’ll even take that opportunity. But the State of the Union address is two weeks away. And in responding to Boehner’s tweet at #spendingistheproblem, there’s no time like the present. Or at least like the next few days. Just as with the fiscal cliff and the debt ceiling, the Republicans’ political leverage, whether real or fanciful, will turn out to be ephemeral.
Unless Obama remains mute.
But as I say in my post, Obama shouldn’t wait the two weeks until the State of the Union address to begin making the point. Just as he didn’t wait a week until his inaugural address to explain to the public what “raising the debt ceiling” actually means--thus pulling the rug out from under Repubs’ disinformation campaign telling the public that it means increasing spending appropriations.
Sargent titles his post “Make strong case that spending cuts hurt economy, Mr. President!” (Amen.) He points out: that
Doug Short at Advisor Perspectives has an excellent column following every GDP release showing what the reported GDP would look like with various deflators.
His latest report is Will the "Real" GDP Please Stand Up? (The Deflator Makes Big a Difference)
How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.Question of the Day
The Lower the Deflator, the Higher the GDP
The BEA puts the latest compounded annual percentage change in the GDP deflator (i.e., the inflation rate) at 0.60%.
Interestingly enough, the Briefing.com consensus forecast was for the deflator to come in at 1.6%. Had the deflator indeed come in at the Briefing.com consensus of 1.6%, Real GDP would have been a percent lower at -1.13%. Had the deflator indeed remained unchanged from the previous quarter, today's Q4 real GDP would be two percent lower at -2.21%.
Let's stop right there and ask: Does anyone out there possibly believe price inflation is a mere .60%?
- With the GDP deflator (the official measure), the reported GDP was -.14%
- Using PCE (personal consumption expenditures) as a deflator, GDP would have been -.77%
- Using CPI (the consumer price index) as a deflator, GDP would have been -1.56%
- Using ShadowStats CPI as a deflator, GDP would have been -4.3%
Here are a few charts courtesy of Doug Short.
click on any chart for sharper image
Real GDP with GDP Deflator
Real GDP with CPI Deflator
Wednesday evening I asked Doug Short for a chart using HPI-CPI as a deflator. It's a chart he normally does not produce but did so this time because we had the data.
Real GDP with HPI-CPI Deflator
For background and an explanation of the HPI-CPI please see Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices; Price Inflation Higher than Fed Admits
Using HPI-CPI as a deflator it hardly appears there was a recession in 2001 at all.
It's debatable which of the three charts best describes reality. However, I vote for the third believing that houses are consumed, even if very slowly (although the land on which the house sits is not). The current assumption is houses are a capital expenditure and people rent housing from themselves at an implied OER - Owners' Equivalent Rate (see preceding link for discussion).
Regardless, the current deflator of .60% is simply not believable, meaning GDP is overstated.
Regression Trends Show Lower GDP Growth Over Time
Notice the linear regression trendlines in the first and third charts. The middle chart would have looked similar if it had such a trendline.
Clearly the trend is toward lower and lower GDP readings. And I expect this trend to continue, likely accelerate to the downside.
Inquiring minds may be asking "Why?"
Ten Reasons for Declining GDP Growth
- Changing social attitudes towards consumption and debt in all age groups
- Demographics of an aging workforce
- A severe lack of high-paying jobs for college graduates
- Kids fresh out of college have delayed marriage, family formation, and home purchases
- Many coming out of college are effectively debt slaves having no way to pay back student loans
- Debt overhang from the housing bust
- Boomers headed into retirement have insufficient savings
- Shrinking middle-class plagued by declining real wages
- Rapidly changing technology negates skills
- Technology, especially robots, currently eliminates more jobs than it creates
Mike "Mish" Shedlock
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Larry Kudlow tries to use the fact that the fall government spending in the fourth quarter of last year was associated with a big drop in GDP growth to argue that lower government spending is good for the economy. Antonio Fatas correct his misguided thinking:
Celebrating negative growth, by Antonio Fatas: GDP growth during the last quarter of 2012 turned negative in the US (-0.1%)... Looking at the different components of GDP, the biggest decline happened in government spending and in net exports (due to the weakness in other economies). This is just one quarter and the data is likely to be revised later in the year, but what is to be learned from the data? The answer is whatever justifies your priors. Here is the interpretation that Larry Kudlow does in CNBC...
He makes the claim that this is indeed a good quarter because private spending (consumption and investment) grew at about 3.4% - after removing inventories that fell significantly. From here he concludes:"Even with the fourth-quarter contraction, the latest GDP report shows that falling government spending can coexist with rising private economic activity. This is an important point in terms of the upcoming spending sequester. Lower federal spending, limited government, and a smaller spending-to-GDP ratio will be good for growth. The military spending plunge will not likely be repeated. But by keeping resources in private hands, rather than transferring them to the inefficient government sector, the spending sequester is actually pro-growth."
So this is an interesting test that he is using to prove that decreasing government spending is good for growth. As long as we see any growth in private spending it means that the decrease in government spending is helping the private sector grow. Of course, the real test is to compare the -0.1% to what would have happened to GDP growth if government spending had not decreased. Reading Larry Kudlow's article it sounds as if GDP growth would have been even lower (although his statement is not as precise as this). Yes, consumption grew and investment (once we exclude inventories) grew as well, but how much? Not enough to compensate the decrease in government spending so the final outcome is a negative (literally negative) performance for GDP growth. ...
We see that government spending fell and this is a component of GDP. A natural reaction might be to argue that the fall in government spending had a negative effect on GDP. Given that the GDP growth number is so low (and lower than expected), this is a reason to believe that the multiplier is positive and possibly large. But, as Larry Kudlow shows, there are always other interpretations.
According to Kudlow's theory (which is contrary to the empirical evidence, but why should actual data matter when there's ideology to promote...note how he tosses inventories aside when they don't agree with his priors, doubt he does that if it is helpful to his case), a decline in government spending should cause the private sector to boom by more than enough to offset the decline in government spending (otherwise growth would fall on net). Yet he is pleased that the decline in government spending didn't cause a decline in the private sector ("shows that falling government spending can coexist with rising private economic activity"), as though that somehow supports his case. It doesn't. Government spending fell, the private sector didn't boom by anywhere near enough to offset it, and the net result was a decline in GDP growth.
[Note: As Antonio points out, "we should not be doing this, to understand fiscal multipliers we need more than one quarter of data, but I am just trying to follow his logic." For example, to qualify this is a way that could be helpful to Kudlow, there may be lags between changes in government spending and changes in private sector activity that cannot be captured in a single quarter of data. But as noted above, this actually doesn't help -- when the empirical analysis is done correctly, government spending multipliers in a depressed economy appear to be relatively large.
Let me add one more thing. I'm all for maximizing growth (with externalities internalized), but I'm also for full employment and sometimes a temporary increase in government spending in the short-run to put people back to work is the best course for long-run economic growth. This is one of those times, especially spending focused on infrastructure. Addressing our short-run problems in this way is, if anything, and contra the Kudlows, helpful for growth.
I don't have any problem asking question such as "what is the best way to raise a given amount of revenue," i.e. trying to minimize inefficiencies and inequities in the tax code with an eye toward growth. I also think it's worthwhile to think about what size of government we want to have, and figure out the best way to support it. I do have a problem with high unemployment, especially when there are steps we could take to put people to work, and even more so when theories about long-run growth that have been rejected by the data are used to institute policies that work against helping people find employment in a depressed economy (e.g. austerity). In any case, with all of our employment problems, why would anyone cheer -.1 percent growth unless "those people" don't matter?]
Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.
Paul Ryan Says Taxes Should Be Raised to Pre-Bush-Tax-Cut Levels. But the Republicans Will Opt Instead For the “Sequester.” Unless, Of Course, the Koch Brothers Intervene.
Another was that he said that if Bill Clinton were president, we would have solved the budget-deficit problem, a statement that he presumably bases on the fact that when Bill Clinton was president, he solved the budget-deficit problem.
The third headline-grabber from that interview was that the Republicans will allow the “sequester” to take effect, presumably because they think it’s pretty clear that Keynesian economics doesn’t work, and because Bill Clinton is not longer president. If Bill Clinton were president, the Republicans would allow him to raise tax rates to the level he did in 2001, this time without having to have the vice president cast the 51st vote in the Senate for the tax increase, and with enough Republican votes in the House to allow a vote on the tax increase.
In other words, if Bill Clinton were president, Ryan and his compadres would not keep refusing to allow the Bush tax cuts on annual incomes of less than $450,000, and tax cuts on corporations, capital gains, and dividends, to expire. But because Obama, rather than Clinton, is president, they won’t. They should be allowed to expire, Ryan says. But they won’t be allowed to expire, because Obama is president.
Instead, the Republicans will opt to test out the the efficacy of Keynesian economics, or not--depending, probably, on whether the Koch Brothers pick up the phone and disabuse Ryan of his belief that Keynesian economics doesn’t work. Before Wall Street does.
Here’s what I obviously don’t believe: That if Ryan actually obviously doesn’t believe--thinks the debt is pretty clear it doesn’t work--he has even basic knowledge of past and current economic fact.
I’ll take his word for it that he was being truthful about his belief. But I sort of expect that the Koch brothers and others will educate him and other congressional Republicans who hold that belief, very soon.