Sunday, February 19, 2012

Does the recovery have legs? Part 1: housing on the rebound

It's only been a few months since I became confident enough in our recovery's strength to start blogging about it and it's still tenuous enough to bear close monitoring. But what exactly should we be watching for? One of the great challenges in evaluating economic situations in general is that reality is fluid and it's often hard to distinguish between cause and effect (e.g., are higher wages pushing inflation up or is inflation forcing employers to pay more?). In this and other posts I am going to provide my take.

It's widely understood that the housing market's recovery is key to the sustainability of the broader recovery, and a bird's eye view suggests things are rebounding:

What this chart shows is that in each of the last 3 quarters residential investment has positively contributed to our economic growth, even after adjusting for inflation. And while the contributions were relatively modest as compared to individual quarters in 2009 and 2010, I like to think the consistency of 3 consecutive upticks is meaningful in its own right. I would caution that this simplistic analysis may be missing important considerations, like that a flood of foreclosures on the heels of the recent bank settlement could swamp the market with inventory and depress investment in new construction. Still, after what we've been through it is helpful to see any sign that activity in the most troubled sector of our economy is trending in the right direction.

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