Housing Slump Drags Down Productivity

Posted by: Peter Coy on November 8, 2006

Economists were dismayed when the government announced recently that there was no increase in labor productivity in the nonfarm business sector in the third quarter. Now, one economist is fingering an interesting culprit: housing.

Here’s the idea: Construction has fallen drastically. But the builders haven’t cut payrolls much yet. That means the output per hour worked in the homebuilding sector—i.e., productivity—has fallen. According to Andrew Tilton of Goldman, Sachs & Co., that one change could explain more than a full percentage point of decline in the growth rate of nonfarm business productivity.

Here’s Tilton from a report today:

This suggests the industry continues to employ far too many workers, and aggressive job cuts in this industry may eventually result as firms try to bring capacity into line with demand—leading to a weaker labor market overall.

Reader Comments

Clay Deschamps

November 14, 2006 12:04 PM

Looking at the big picture, i.e., beyond this momentary productivity blip, one cannot help but wonder if the inconceivable deficits - the federal budget and other sundry account deficits propping up the dollar - are but the reflection of the fact that the US produces less & less while consuming more and more. And who's financing the party? Does one need a Harvard MBA to recognize that the colossal dollar reserves of countries around the world are the true financiers of the real (sic) estate frenzy. How long will they hold on to all of those dollars before realizing that they were simply blank checks that were never supposed to be cashed? And then one day, they all cashed in...

Thomas Luxton

November 20, 2006 4:06 AM

Good point mate, I'm a firm believer that Ricardo's comparative and absolute advantages theories are irrelevant in today's day and age. The fiscal balance, current account, productivity and arguably the big macro indicators of inflation, GDP and employment are today influenced most importantly by interest rate differentials and the flow of savings across borders. One must look at investable funds as a tradable commodity, with a price (i.r %) that thesedays is just as large a component of the Balance of Payments as trade in goods and services. Of course, hardly any politicians look at the 'other side' of the Current Account Equation (Net Capital and Financial Accounts) to explain the Trade Balance. What good, therefore, is a 27.5% import tax on Chinese goods when you are really addicted to importing money? (Tax on financial transfers, you reckon?) Nonetheless, I believe that the main culprit, at end of the day, is the irrational overseas investing of Asian reserves in markets where the return is often 1/2 to a 1/3 of what they cold get in their own financial markets.
We all know why they do this (BW Theory II), but the ramifications of this are causing disruptions and anomalies in global markets ranging from asset bubbles in property markets to import substitution and hedge fund, managed fund and debt-funded-take-over frenzies. If you would like to continue this discussion, please contact me at kiwi031@hotmail. Thanks!

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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