DS News - Digital Archives

» VISIT US ONLINE @ DSNEWS.COM MARKET PULSE recovery, it's still struggling to gain traction in a dithering economy. While housing has historically provided the push for economic I community is "it depends" and, indeed, leading voices champion both sides of the debate. Bureau of Economic Research (NBER)—the organization that sets recession start and end dates—suggests a close relationship between housing (measured in the paper by residential investment) and the overall strength of the economy. But according to John Williams, president of the San Francisco Federal Reserve Bank, there are other, more influential factors. A recent paper issued by the National By the Numbers Housing, to be sure, is a major driver of the economy. Over the past 20 years, residential investment—the surrogate measure used in the NBER paper by authors Michael D. Bordo, an economics professor at Rutgers University, and t's a question that rivals the age-old riddle of "Which came first: the chicken or the egg?"—Can the economy recover if housing doesn't? More specifically, is the moribund housing sector a cause or a symptom of the tepid recovery? The typical—and expected—answer from the economic Joseph G. Haubrich, an economist with the Federal Reserve Bank of Cleveland—averaged about 4.2 percent of the nation's gross domestic product (GDP). Since the onset of the Great Recession in December 2007, including the pe- riod since the recession "officially" ended in mid- 2009, that average has been 2.7 percent. Since the June 2009 recession end date established by NBER, residential investment has represented just 2.3 percent of the economy as a whole. "The housing sector has been a significant driver of recovery from most recessions in the United States since World War II," Federal Reserve Chairman Ben Bernanke said in a speech at Jackson Hole, Wyoming, in August 2011, "but this time—with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuy- ers, and ongoing concerns by both potential borrowers and lenders about continued house price declines—the rate of new home construc- tion has remained at less than one-third of its pre-crisis level." The numbers bear out Bernanke's observa- tion. Housing starts averaged 1,228,000 in the six months prior to the onset of the recession in December 2007 but in the six months fol- lowing the "end" of the recession in June 2009, the average was 578,000—a staggering 52.9 percent decline, surpassing the 42.3 percent drop witnessed during the months surrounding the 1973-1975 recession. (See table on page 60) The NBER Position According to Bordo and Haubrich's study, one historical clue to a recovery, specifically its size or steepness, is the size and steepness of the downturn; deep drops in a business cycle are usu- ally followed by a near-sized recovery. But that hasn't been the case following the 2007 recession. 89

• Cover