Housing Starts

...the driving force to which the housing market responds is not relevant…

The Wall Street Journal published an article on December 14, 2006 entitled “Housing, Auto Slumps May Defy Usual Role as Recession Harbingers”. Usually, the housing industry slows construction and new home starts in response to rising interest rates. The rise in interest rates makes homes less affordable reducing demand. In this case, the article proposed that the housing industry has slowed construction and new home starts in order to sell off inventory, so it may not be a predictor of broader forces that would cause a recession. But the driving force to which the housing market responds is not relevant to the predictive ability of the housing market
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The construction industry as a whole and the suppliers of construction materials together represent the largest employer of semi-skilled labor in the US economy. Construction labor is also the largest employee pool which can never be outsourced overseas. An employer can’t generally hire a team of Chinese laborers to build a house and ship it to Seattle. Of course, there are exceptions, but not significant ones.

Fewer starts don’t immediately affect the labor pool…

The reason that housing is a predictor of the economy is that housing starts don’t slow directly due to a slowing in the economy, rising interest rates, or a decrease in affordability. They respond to a buildup in housing inventory and contractors who are unable or unwilling to capitalize additional construction. As contractors reduce construction efforts, it causes that slowing economy, hence the predictive component. When housing starts slow, eventually construction laborers lose their jobs. Fewer starts don’t immediately affect the labor pool because of the projects which are already under way, but as these laborers lose their income a few months later, they will begin to spend less. Again, there is a delay since people take time to reduce their spending. As money gets tighter from prolonged unemployment, spending reduces even further.

The largest relevant moderator to the potential slow down is…

The fact that retail sales rose 1% in November from October is not surprising or, for that matter, particularly relevant to the argument. I don’t believe that the delay from reduced housing starts has had time to work its way through the economy. The largest relevant moderator to the potential slow down is the change in the strength of the dollar. As exports increase and imports decrease in response to a weakening dollar, this will help to moderate the slow down from housing.