More on Housing

Posted by: Michael Mandel on May 23

One of my regular readers, Jack Krupansky, takes issue with my previous item. In a comment, he says that

Sorry, but it’s more than a little misleading for you or anybody to categorically state that “Every dollar going into housing is a dollar that is not going somewhere else, such as tech and telecom spending.” Each of those dollars is not simply going into a hole in the ground, but is spread throughout the entire economy like fertilizer.

Then he goes on to say

I would invite you to do some journalistic research to find out what fraction of each dollar spent on housing does in fact eventually end up as technology or telecom or other business investment, as opposed to each dollar spent at starbucks, at a movie theater or DVD rental, an airline ticket, on a Slurpee, or placed in a bank savings account

Okay, Jack, I’ll take up that challenge. In fact, the numbers show that construction is very low-tech, in terms of the amount of tech stuff that it buys.


Fact #1: In 2003 the entire construction industry only invested $1.2 billion in information-processing equipment, according to the Census Bureau. Total industry output: $954 billion. That's microscopic.

Fact #2: In terms of inputs, construction mainly consumes materials such as wood, plasterboard, fabricated metal parts and the like. Tech inputs, such as telecommunications and computer services, make up only 3.4% of intermediate inputs. The comparable number for retailing is 5.9%, and for motion picture and sound recording industries is 6.1%.

Fact #3. Construction is a relatively labor-intensive industry, but the majority of its workforce are towards the lower-end of the wage scale. That means they are less likely to be big spenders on home computers and broadband.

I don't have a number summing up the whole thing, but there's little doubt that spending on construction is less stimulative for tech and telecom.

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Reader Comments

Jack Krupansky

May 23, 2005 08:21 PM

Thanks for the clarifying info. Now... so let's suppose that each of those housing dollars were to be spent differently, what would the result be in terms of net spending on tech and telecom? We have to ask where those dollars spent on housing come from. The consumer may or may not make a down payment, closing closing costs, purchase of appliances (possibly even a computer, big TV, or other consumer electronics) and other furnishings. The rest of the dollars come via the mortgage (and construction loans). Where in fact are all these other dollars coming from that are financing the housing boom? I'm confident that your economic and journalistic prowess could answer that question. The next question is what percentage of those dollars really would be spent on technology if the housing boom wasn't there to be financed. Some people in fact suggest that businesses have a glut of technology, are seeking to cut costs further and that the meager forecast of a 7.9% tech spending increase over the coming year is because businesses don't need or want to spend that much more, not because housing or the federal government are soaking up investment capital. My view (undocumented as it is) is that there is a business credit glut, and that's why capital is going off to finance other ventures such as housing. A lot of companies really are seeking to trim debt and could care less about getting all of those dollars that are chasing after mortgage financing. After all, why would all of that private capital be chasing after the relatively low returns of home mortgages if businesses were offering significantly better risk-adjusted returns? Whether the answer is lack of business demand or an excess of business risk, the result is still the same: financing the housing boom "looks" like a better deal.

I'll accept your revised thesis that "spending on construction is less stimulative for tech and telecom", but we need to identify what some of the alternative destinations for capital might in fact be were the so-called housing bubble to either burst or deflate or simply "revert to the mean".

-- Jack Krupansky

David H

May 27, 2005 03:25 PM

Fundamental question: what is inherently better for the economy with Tech/Telecom than Residential Construction? Hasn't Tech/Telecom already found a real adrenaline partner in Security spending (federal debt)? Why should I buy yet another home computer over replacing my furnace with a more efficient one, or my house with a more efficient ("smart") house?

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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