Tuesday, September 25, 2018

Housing: Part 323: Construction Employment during the crisis

I have dug into employment numbers a bit, and I think there are some interesting things here.

What happened?  A reasonable person might say this: There was overbuilding by the end of 2005.  This required a shift out of construction employment as the housing bubble wound down.  Federal officials underestimated how much the housing correction would bleed into the rest of the economy.  Eventually the collapse of the construction market in the bubble cities metastasized and caused employment and consumption to contract more broadly.

As I have so often found, the truth may be closer to the opposite of that.

Here, I am using state data, and I am using two independent variables to describe each state.  The first variable is the level of construction employment in December 2003 as a percentage of total state employment.

Construction as % of Total Employment: higher vs lower construction states
Here is a graph of construction employment as a percentage of total, over time, for states that had construction employment one standard deviation above or below normal in 2003.  There are several interesting points here.

(1)  States with high construction employment in 2003 are states that typically had high construction employment in the past(in other words, building lots of homes and growing).  And, notice that from the end of 2003 to early 2006, states with less construction employment continued to have flat construction employment but construction employment in the high construction states went higher. This supports the idea that the housing boom was just an acceleration of longstanding patterns of migration.

(2) When the CDO panic hit in the summer of 2007 and the recession officially started in December 2007, construction employment was still near the peak of the boom.  There was no re-sorting out of construction into other forms of employment before the recession.  Then, during the first year of the recession, construction employment did start to drop somewhat in the growing states.  But, it was only after the financial crisis that construction employment saw its steepest decline.  The recession caused the contraction in construction employment.  Construction continues to run below the pre-boom levels in the states that had previously been high construction/high growth states.

1 Year Change in Total Employment, by State
But, interestingly, there was a contraction that preceded the recession in total employment growth in high growth states.  It's just that that contraction was not focused on construction employment.  It was a general contraction.  And it was sharp.  Employment growth in states that had low construction employment continued along at its (low) flat rate of just under 1% annually.

So, there was an employment slowdown in the states that had been building a lot of houses, but it wasn't a slowdown in construction employment - even though housing starts were dropping sharply.

Also, this graph shows that there was an especially wide gap in employment growth in 2004-2006 between high construction and low construction states, but, compared to the 1990s, the gap wasn't wider because the high growth states were growing more.  It was wider because the low growth states were growing less.

Construction employment as % of total: bubble and non-bubble states
The second independent variable I used was the change in construction employment from December 2003 to March 2006 after accounting for the correlation between the pre-existing level of construction employment and rising construction employment that is visible in the first graph.  In other words, the first independent variable is a measure of persistent migration patterns and the second independent variable is a measure of "bubble" activity from 2003-2006.

The pattern is similar during the boom and early crisis.  Construction employment peaked in 2006 and remained relatively high until the recession began, then started to decline, and especially declined after the financial crisis.

But, notice the difference after the crisis.  The "bubble" states - states that had unusual growth of construction employment during the boom - never saw construction employment contract below the level of construction employment in non-bubble states, and then recovered more strongly after the recession, so that now, they are back near the construction levels of 1996-2003.

So, the states that had accommodated persistent in-migration for decades have been permanently hobbled by the housing bust (They continue to have higher construction employment than other states, but not as high as they previously had.), while the states that actually had unusual construction employment growth during the boom continue to have unusual construction employment growth compared to other states.

As with other data, this suggests that we didn't bust a housing bubble.  Instead, there was an acceleration of long-standing migration patterns, and those migration patterns have been hampered by a crippled housing market.

Unemployment rate: high vs. low construction states
There is a similar pattern in the unemployment rate among states.  The unemployment rate was lower in both the long-term growth states and the bubble states until mid-2008, then the unemployment rate in all states rose together through 2009, regardless of their previous construction employment levels.  As shown above, it was then that construction employment really collapsed.  In the bubble states (the states with unusual construction employment growth from 2003-2006, not shown in this chart) the unemployment rate continued to move in line with other states.  But, in the states where there had been long-term high levels of construction employment, the time period where their unemployment rates were especially high was 2010 through 2012.

This last graph is of the unemployment rate for the states that had construction employment one standard deviation above and below average in 2003.  And, here I have added a hypothetical state with zero construction employment, which I think gives an interesting baseline for thinking about construction and non-construction employment before, during, and after the crisis.

The crackdown on lending in 2008 and after, and the consensus view that new construction was problematic were the primary causes of dislocation.  Imagine if construction employment in high growth states had managed to bottom out at even 5.5% of total employment in 2009 and recovered from there.  Or, if it had recovered more quickly, as it had in the 1990s (which wasn't exactly a building boom decade, itself).

I am hoping to get a chance to look more thoroughly at this, but in the meantime, this seemed worth sharing.


  1. As always, thought-provoking post.

    Yes, the vast bulk of homebuyers pre-2008 were making what had been one of the safest investments of the last 50 years, were buying a tax-advantaged place to live, and would (it is usually suggested) sink roots into their communities, and become better citizens.

    After 2008, one prominent narrative was that it was urban residents (dog whistle) and the Clintons, armed with the CRA, that tanked the global economy, by strong-arming banks to lend to high-risk borrowers.

    Since ten years ago the number and complexity of explanations of the 2008 Great Recession has multiplied with each passing year. Many narratives have agendas.


    This above is another explanation, It is a bit heavy on the "evil bankers" but it has some interesting observations on how little the bailouts helped ordinary homebuyers. The international angle is interesting too.

    And yes, one does not have to be cynical or a leftie to suspect regulatory agencies become captured by the industries they regulate.

    1. I haven't read Tooze's book yet, but my initial reaction to that article is that it is fundamentally wrong and is burdened by what Geithner calls "Old Testament thinking".

    2. - I didn't read Tooze's book but I think the article makes one major mistake. The article mentions that the FED bailed out the european banking system because there was a shortage of US dollars in Europe. And that's outright wrong. By bailing out the european banking system the FED also bailed out ........ the US (!!!) financial system. Because Europe did have US dollars but these US dollars were/are invested in US T-bonds. (think: currency reserves). The european banking system was able to cough up US dollars but that would have meant that Europe was forced to sell their US T-bond holdings. Just guess what would have happened when Europe and other countries abroad would have dumped their US T-bonds. Rising USD and rising US (!!!) rates anyone ?

  2. Well, below is a view you will like even less, so why I am referring to it?


    I think the comments on non-residential construction and values are worth pondering. Even a wino sometimes has some insights.

    Dean Baker seems to have never heard of the monetary policy, btw. At least he never mentions it in this post.

    Boy, Kevin Erdmann needs flamethrowers to burn through the thickets of agenda and premise that cover the 2008 Great Recession terrain.

  3. - Do these numbers include the illegal mexican that helped to build all those houses ? I assume they don't because these illegal workers are not registered anywhere.