Edward Leamer

Housing and Recessions, Or, This Time it Isn't Different

In Friday's diary, Housing is Nowhere near Bottom, BUT ... I cited as I have several times previously a paper on housing cycles and recessions that was presented by Prof. Edward Leamer to the Federal Reserve at its Jackson Hole conference in 2007. The paper itself is an excellent, in-depth analysis and I highly recommend your reading it in full if you have an hour or so on your hands due to inclement weather, indolence, intellectual curiosity, or if you just generally have a pathetic life.

Unfortunately, many people are dismissing Leamer because even though the data in his paper led to a spot-on conclusion, namely:

The historical record strongly suggests that in 2003 and 2004 we poured the foundation for a recession in 2007 or 2008 led by a collapse in housing we are currently experiencing....

Are we at the bottom of the recession now?

Back in August 2007 when I was first formulating my idea of a "Slow Motion Bust" that would recreate the Panics of the 19th and early 20th centuries, but in multi-year s l o w m o t i o n, I wrote on the Big Orange Political Blog that business cycle research seemed to be making a resurgeance. In that blog post, I discussed the compelling data set forth by UCLA economist Edward Leamer in a paper presented at Jackson Hole earlier in August 2007 (warning: pdf).

To summarize that blog entry, according to Prof. Leamer, the 10 recessions that have occurred since World War II have followed a typical pattern. Housing declines first, well before the recession; then durable goods especially cars (which fall most precipitously during the recession); then consumer nondurables (generally retail sales); and finally at the end, consumer services: