Sunday, June 20, 2010

Relationships Don't Last Forever: A Story of Divorce

Economist's View recently pointed out the relationship between capacity utilization and unemployment.  This graph shows the relationship of capacity utilization vs. unemployment:

An increase in  capacity utilization is usually immediately followed by a decrease in unemployment.  Economist's View makes the claim that :
"That is, in past recessions an upturn in capacity utilization was matched by an upturn in employment, there was no delay in the relationship, but in recent recessions there has been about a half year delay before unemployment reacts to changes in capacity utilization (or perhaps even a bit longer)."
We can definitely see this delay in the 2001 recession.  Notice how capacity utilization turns up and unemployment is initially very slow to drop.  The argument is being made that we are going to see the same thing this time around, where capacity utilization rates improve but unemployment won't drop for at least half a year.

A look at housing starts vs. unemployment:

Residential investment usually pick up at the end of a recession but not this time because of excess housing inventory.  There are too many existing properties for sale so we are not going to see strong housing starts data for a while.  This may lead to a slow decline in the unemployment rate as a growing housing sector usually creates jobs.

Calculated Risk explains the following:
"Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. After rebounding a little in early '09, housing starts have mostly moved sideways"

1 comment:

  1. Until unemployment declines to less than 8%, it is highly unlikely that housing starts will significantly increase because total supply will dramatically increase due to those who have chosen to not put their home on the market due to low pricing will respond aggressively to greater demand created by employment,