Removing Housing from GDP

Despite the weather improving in March, pending sales of
existing homes decreased at a seasonally adjusted annual rate of 4.9%. Sales were
down 10.5% from one year ago. Economists were looking for a 0.4% increase.

While some people ignorantly insist housing is having zero impact on the economy, I am heartened to see the business press isn't buying into that nonsense. Bloomberg's Caroline Baum not only punctures that absurdity, but assigns a political explanation for it as well:

"Excluding housing, the U.S. economy is doing just fine.

That's the latest rationalization of a select group of operators who think that the Bush administration's 4.6 percentage point cut in the top marginal tax rate and 5-point reduction in the top capital gains rate can protect the economy from any and all ills.

To say that ex-housing the economy is doing just fine is tantamount to claiming that, ex-Iraq, Bush's Middle-East policy is a rousing success."

Caroline pulls no punches. I am partial to analogy used by Deutche  Bank's Joe Lavorgna. We've been discussing how utterly untethered from reality that analytical approach is, and Joe observed:

"Backing out housing today is like going ex-Capex in the late 1990s. Corporate Capital Spending was huge in the the nineties, and if we remove its contribution from GDP from 2000 forward, well, then there was no recession in 2001-02."

Let's do a quick review of our favorite Ex's:

• Back the things going up in price, there's no inflation (Inflation ex inflation)
• Remove housing from GDP, there's no economic deceleration (GDP ex Housing)
• Eliminate the CapEx spending from the tech boom, and there was no 2001 recession (GDP ex Capex)

>

Source:
Housing? What Housing? I Don't See Any Housing
Caroline Baum
Bloomberg, April 30, 2007
http://www.bloomberg.com/apps/news?pid=20601039&sid=aKHxvJuBB3FE&

Comments

[huangjin:]

The 2001 recession was very mild, so backing out cap-ex would have made sense, if you were trying to make money. A number of sectors outperformed, such as restaurants.

2007 May 01 02:53 PM

[Johnny Bitc...:]

Matthew -

Are you drunk ? that might be the stupidest attempt at logic i've seen in some time, but it probably helps explain why the crap in the press seems to fly - people can't seem to think clearly anyway, so they might as well listen to the phony analysis offered by ignorant journalists.

Anyway, explaining what would have made sense based on ex-post analysis of the subsequent actual results is stupid (though hopefully you are just drunk).

You are the very reason the press can get away with phony, tortured, random explanations for things it doesn't understand. No disrespect intended, but either put away the bottle or stop having opinions.

john.

2007 May 01 10:18 PM

[Johnny Bitc...:]

In the end, the reason why the press can get away with faulty, uninformed logic is x-fold:

1. its just random crappy content to surround with random profitable advertising.

2. the readers are generally clueless.

3. there is enough uncertainty about the future as to call into question even the most astute analysis.

4. the vast majority of financial journalists fall under the umbrella characterization: those who can, do / those who can't find some kind of way to make money out of their superficial and inadequate education and skills.

regards, john.

2007 May 01 10:24 PM

[wixeywaxy:]

While I agree that you can't ignore the housing/real estate stagnation, I do think it is exaggerated also. The effects of a slow down in real estate do not produce the same kind of negative effect to the overall economy as does a stock market collapse. We aren't seeing people living in their cars and even at a considerably reduced level the market is pretty good measured against levels of just a few year ago. We won't be going back to the hot housing market because it was unsustainable but as long as interest rates remain stable this will be digested rather rapidly and most people will not walk away from their mortgage because they have to live somewhere . Vic

2007 May 02 09:33 PM