By Karl Smith
Earlier I fretted about the possibility of an Aggregate Supply shock to housing. Well what if that doesn’t happen and resources do move as freely as my mental model of the economy predicts. It could produce roaring growth.
I draw a parallel to prediction I made earlier about the Great Recession. In early 2008 I began to become concerned about the possibility of a recession within a recession.
In a sense this means that we will be in the midst of a recession (high unemployment), at the same time that we are experiencing leading indications of a recession (construction slowdown). This sets up the possibility for a vicious cycle in which unemployment further depresses housing which leads to even greater unemployment, or a recession within a recession.
Again, I want to pile caveat on caveat but I would be remiss to point out that this dynamic does not have the potential to reverse itself in the next 18 months.
We are seeing signs of a recovery at a time when investment in housing is at extreme lows. This sets up the possibility that increasing employment could lead to increasing demand for housing which could in turn lead to increasing employment – the boom within a boom.
This atypical. Usually housing leads in and housing leads out. The fact that housing was still falling even as the recession was in full gear was a factor in my original recession with a recession prediction. The fact that housing is still depressed even as the economy shows signs of life would be the driver behind boom within a boom.
I am not calling it at this point. Not by a long shot. But, the fundamentals are building.