Housing Starts and the Unemployment Rate
An update by request: The following graph shows single family housing starts (through April) and the unemployment rate (inverted) through May. Note: there are many other factors impacting unemployment, but housing is a key sector.You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.Click on graph for larger image in graph gallery.Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and have declined recently, but mostly starts have moved sideways for the last two and a half years. This is one of the reasons the unemployment rate has stayed elevated compared to previous recoveries.This is what I expected when I first posted the above graph almost two years ago. I wrote: [T]here is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think ... a rapid decline in unemployment is also unlikely.Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.However this time, with the huge overhang of existing housing units, this key sector hasn't been participating. The good news is residential investment should increase modestly in 2011, mostly from multi-family and home improvement, and that will help push down the unemployment rate. But I still think the labor market recovery will be sluggish until the excess housing supply is absorbed.