Austin Goolsbee spoke on Tuesday at the National Association of Business Economics (NABE) 27th annual Economic Policy conference, providing an economic review of where we were, where we are, and where we're going.
Marking the end of "Phase 1" (i.e. putting out the economic fires of 2008), he sees the economy firmly in "Phase 2" today - characterized by economic recovery and growth. Goolsbee laid out his perspectives, including a perspective that portends that economic growth in the current business cycle is possible, if not preferred, without residential housing and construction as a key driver.
Goolsbee explained how the current economic recovery breaks Okun's Law (pdf) which states that a ~3% rise in GDP should result in a ~1% drop in unemployment. Going further, He noted that during the recent economic downturn, productivity growth rose 5-6% while output only increased 1-2% (see Table 1), leading to rising unemployment in 2008-09 to their current levels. More recently, however, this relationship has inverted - productivity gains are back down to a more normal level of 2-3% while output is rising at 5-6%. This should lead to decreases in unemployment.
To achieve the desired Phase 2 growth, Goolsbee noted that the economic boom of the 2000s, led by consumer spending and residential housing, was unique when compared to prior growth cycles and unsustainable in the long run, as our savings rates dropped to nearly 0% and housing prices bubbled while export growth and business investment remained undersized in this period.
The current recovery, focused on traditional business inputs and a heavy dose of small business expansion (see Startup America Partnership), should reflect a more normal and sustainable path to economic growth in his view. His comments reflected a realistic viewpoint that housing will not recover in the near term and should not be depended on to lead the economic recovery.
Sounds good, but what will be the source of exports and business investments? The data tells a different story. While exports were up 17% in 2010 from 2009, imports also rose with the trade deficit getting larger 2010 (pdf) . On business investment, the Bureau of Economic Analysis February 2011 report (see Table 1) states (pdf):
Real nonresidential fixed investment increased 5.3 percent in the fourth quarter, compared with an increase of 10.0 percent in the third. Nonresidential structures increased 4.5 percent, in contrast to a decrease of 3.5 percent. Equipment and software increased 5.5 percent, compared with an increase of 15.4 percent. Real residential fixed investment increased 2.8 percent, in contrast to a decrease of 27.3 percent.
The challenge with focusing only on this short-term rise is that fixed investment declined 9.5% in 2008 and declined another 22.6% in 2009 during the recession years. While the numbers were higher in 2010, the base is smaller and these figures also ignore how US companies are investing heavily abroad in places like this auto plant in China.
I get the sense that while the GSEs are under review and the loan modification and foreclosure prevention programs continue, the administration has accepted that housing cannot be relied upon as a significant source of growth. As existing inventory rises, properties entering the open market affect the demand for new home construction. The quality of these homes hitting the market affects home values across the board, creating economic losses for would-be home buyers on the sale of their existing home. The BuildFax Residential Remodeling Index has been moving higher - good for consumer durable spending, but also portraying how homeowners are looking at their own homes for housing improvements instead of seeking new houses to meet their living demands.
Goolsbee cited the Solow Growth Model as a reference point for the administration's "out-innovate, educate, and out-build" statement from the State of Union Address. This should be the goal, but the data doesn't support that this is the direction we're headed in the short term with growing budget deficits and entitlement programs. The 2010-11 Global Competitiveness Report released by the World Economic Forum (pdf) ranks the United States 32nd in the world for their "Basic Requirements" category (consisting of institutions, infrastructure, macroeconomic environment, and health and primary education). That leaves plenty of opportunity for fixed investment to improve these core tenants of economic growth, but these tenants either require government investment or are costs the government has chosen to bear in place of the private sector (i.e. health care).
Residential housing may not be the answer to our economic woes, but I'm not quite buying the export and investment story either. The complete talk is available here from C-SPAN.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
