The coverage of Charles Evans, Chicago Federal Reserve Bank President, can be found here. Here is a quote from the article:
"Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover."
I have to call Bullshit on this statement. Housing as measured by fixed residential investment has contributed on average 4.1 percent to GDP since 1929. It is actually a very small part of our economy when compared to consumer spending, government spending, and private investment. It is not an engine of economic growth, it is a symptom of economic growth. Economists should know better. When consumers feel good about their job security and have rising wages, they invest in housing. Therefore, housing sector growth lags economic growth not the other way around. When did we quit recognizing this and start treating housing as a bigger component of our economy than it actually is?
If you don't want to take my word for it because I blog under the name Turdy and swear like a sailor, take a look at this graph I created tracking the private sectors housing investment over time as a percentage of GDP.
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Data from Bureau of Economic Analysis, Graph and Data Analysis by Turdy, Design based on Calculated Risk Blog |
It must make you wonder how a sector that directly contributes such a small share of GDP could facilitate the destruction of the larger economy. The answer is that the housing bubble fueled indirect contributions to GDP through lax lending standards and consumers use of their homes as ATMs. Housing didn't gain that much in share of GDP during the bubble, it reached a peak of 6.1 percent in 2005 which was a 50 year high but still only 2 percent over its long term average. During this same period however, consumer spending on goods and services grew because people felt wealthier which led to increases in goods manufacturing and spilled over to other sectors of the economy. When the bust occurred, the reversal of the positive spillovers was catastrophic for manufacturing, retail, and other major sectors of the economy.
Economic recovery will rely on the consumer in this recession as it has in EVERY RECESSION IN OUR HISTORY. Before people buy houses, they need to be able to pay for necessities like transportation, food, and child care. When they feel secure in their jobs and have wage growth, they will start investing in more long term investments like housing but we are nowhere near that point. It is a colossal waste of time for everyone to worry about propping up the housing market and suggesting that it will grow our economy. We have already paid the price for the fallacy of this argument, why must we continue on the same path?
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