Housing’s Muted Role In The Economic Recovery

The February update on housing starts arrives later today, but a repeat performance of January’s near-15% rise isn’t in the cards. The consensus forecast calls for a 3.5% decline for last month, according to Briefing.com. The housing market, in other words, is still treading water after a severe correction. Housing starts may be stabilizing after falling more than 50% from the glory days before the Great Recession, but a rebound of any magnitude is widely discounted as improbable for the foreseeable future. The question is how that pinches the economic recovery?

Historically, “the housing component of GDP (more formally known as residential investment) tends to be a solid contributor to GDP growth during a recovery,” according to a recent report from the St. Louis Fed. “Although residential investment is a small component of GDP in levels, it can contribute substantially to the GDP growth rate for short periods of time.”

Source: St. Louis Fed
This time is different, however. As St. Louis Fed economist Michael McCracken reports: “A year and a half after the official end of the recent recession, residential investment has yet to make a sizable contribution to GDP growth and is, in fact, presently making a negative contribution.” Today’s update on housing starts (scheduled for release at 8:30am Washington time) isn’t expected to change that perception.
“Housing is lagging, and that’s another reason why jobs aren’t coming back,” William Dunkelberg, chief economist of National Federation of Independent Business, noted in a speech yesterday.