Real estate supply's dead weight sits atop jobs rebound

Source: Federal Reserve Bank of St. Louis

Why Is Employment Growth So Low?
Juan M. Sanchez, Economist
Daniel L. Thornton, Vice President and Economic Adviser

Total nonfarm payroll employment declined by
nearly 8.75 million jobs from December 2007 to
February 2010 and has since increased by 2 million,
reducing the unemployment rate from 10.1 percent in
October 2009 to 9.1 percent in September 2011. A widely
asked question is why employment growth is so low. We
don’t know all the reasons, but the data suggest that the
pre-recession boom in residential and commercial real
estate and the subsequent bust are very important factors.
The chart shows total nonfarm employment and employment
in construction for January 2002 through September
2011. Both declined significantly during the 2007-09 recession
and for several months after. From the beginning of
the recession (December 2007) to the trough in total
employment (February 2010), total nonfarm employment
declined by 8.7 million jobs, while construction employment
declined by nearly 2 million jobs—
22 percent of the total. Hence, construction
alone accounts for much of the decline in
employment since the start of the recession.
These construction numbers, even though
high, likely underestimate the importance of
construction in explaining the slow growth
in employment for at least two reasons. First,
as the chart shows, the peak in construction
employment occurred in April 2006, well in
advance of the recession and near the time
house prices and residential investment
peaked.1 By the start of the recession, construction
employment had already declined
by nearly a quarter million jobs from its peak;
this number could be added to the decline in
construction employment attributed to the
recession.
Second, the numbers in the figure reflect
only the direct effect of the decline in construction
employment and not the indirect
effects that caused a slump in employment in
other industries. We estimate these indirect
effects using the Employment Requirements Matrix of the
Bureau of Labor Statistics.2 Assuming that about 1 million
construction jobs were lost when the real estate bubble
burst, we estimate that nearly 800,000 additional jobs were
lost in other industries as a consequence. Hence, the decline
in construction accounts for nearly 40 percent of the total
decline in employment between December 2007 and
February 2010.
To best evaluate employment growth, it is important
to note that while real GDP is now slightly above its prerecession
peak and real consumption is about 1.5 percent
above its pre-recession peak, real fixed investment is still
19 percent below its pre-recession peak, which occurred
in the first quarter of 2006, and 15 percent below its prerecession
level. Essentially all of the slow growth in investment
is directly attributable to low levels of real estate
investment. Real residential investment is nearly 60 percent
below its peak in the fourth quarter of 2005 and 38 percent
below its pre-recession level. Indeed, it has declined slightly
more since the end of the recession in June 2009. Real
nonresidential investment in structures (investment in commercial
real estate) is 28 percent below its pre-recession
level. All other components of real fixed investment are
very near or significantly above their pre-recession levels.
Hence, the anemic investment in residential and commercial
real estate has significantly contributed to the slow
growth in employment. The problem appears to be an
excess supply of real residential and commercial real estate,
which will continue to impede investment in residential
and commercial real estate. Unfortunately, the real supply
of real estate can only adjust by depreciation, population
growth (two very slow processes), or by a decline in its real
value, which occurs when real estate prices decline relative
to the prices of other commodities. While these adjustments
take place, we expect only moderate growth rates of
employment.

URL to original article: http://www.builderonline.com/builder-pulse/real-estate-supply-s-dead-weight-sits-atop-jobs-rebound.aspx?cid=BP:121211:JUMP

For further information on Fresno Real Estate check: http://www.londonproperties.com