by Calculated Risk on 9/22/2010 11:14:00 AM

An update by request ...

Click on graph for larger image in new window.

This graph shows single family housing starts and the unemployment rate through August (inverted).

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.

Housing starts (blue) rebounded a little last year,and then moved sideways for some time, before declining again in May.

This is what I expected when I first posted the above graph over a year 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 investment¹ (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 isn't participating. So in this recovery there is less job creation, less household formation, and less demand for housing units than in a normal recovery. This is sort of a circular trap for both GDP growth and employment that will persist until the excess housing units are absorbed.

Although there are other factors impacting the unemployment rate, the weakness in RI is one of the reasons I expect the unemployment rate to tick up over the next several months.

¹ RI is mostly new home sales and home improvement.