GDP - THE MEASURE THAT ISN'T

In a recent post I discussed the issue of accuracy of economic data, focusing particularly on Gross Domestic Product or GDP (http://econlives.blogspot.com/2015/08/us-growth-worse-than-we-thought.html). Here I want to address misconceptions commonly held about the definition and content of GDP itself, that lead to misunderstandings and incorrect policy prescriptions. It is commonly held by many people, including journalists and economists, that GDP is a measure of an economy's size, and sometimes even a measure of an economy's health and the wellbeing of the population. These misconceptions lead people to think that an increasing GDP, commonly referred as GDP Growth, is the end-all purpose of an economic system. Positive GDP growth is automatically taken to be a good thing, that unquestionably it is a sign of progress. Moreover, a high GDP growth rate is automatically seen as better and more desirable than a low one. This high growth is interpreted as a signal that the economy and the well being of the population are improving. But in reality such is not always the case, these interpretations are often incorrect.

GDP is not the same as Production
The most commonly made mistake is to confuse GDP with production within a region, the U.S. in our case. Typical is the view of Sho Chandra, for instance, a reporter at Bloomberg who recently referred to Gross Domestic Product as "the value of all goods and services produced." Also, the common error of equating GDP with "total" production can be found not only in Wikipedia, as one would perhaps expect, but also in statements by such venerable institutions as the OECD, that defines GDP as

"an aggregate measure of production equal to the sum of the gross values added of all resident, institutional units engaged in production"

Which is not an improvement over the commonly held understanding of Bloomberg and others.

Also, the U.S. agency that comes up with the GDP data, the Bureau of Economic Analysis, defines GDP slightly different by adding the phrase

"less the value of the goods and services used up in production..."

This statement brings to the forth a key point to understand what GDP measures. It does not include any goods or services that were used in the production of other goods. For instance, a chair that is purchased by a consumer in a given quarter will show up under Consumption in the GDP accounting. But the materials used to make that chair, such as the wood, glue, nails, paint, etc. are not counted on GDP because they want to avoid the so-called "double-counting." All those things (wood, nails, etc.) were produced but are not counted, thus GDP is not a measure of production as such. A true measure of production would include all those "intermediate" goods that are used to make the final goods that consumers purchase.

A more subtle misconception is the implicit assumption that GDP represents the value of things or services produced in the period in question, whether it's a quarter or year. The first term in the equation making up GDP, "consumption," attempts to capture the purchases of goods and services made by consumers in the quarter in question. But those purchases may be of goods that could have been produced in a previous quarter or year. Naturally perishable goods such as food items, were very likely produced within the same quarter; but this may not be the case with more durable items that last longer than a quarter, such as cell phones, appliances or canned food, that were very likely produced in previous quarters once we take account of the time lapsed between their production, inventorying and shipment to the final destination where a consumer may purchase it. That is, consumption of goods in a specific quarter is not equal to production of goods in that quarter.

Thus, the largest component of GDP, consumption, does not truly reflect production but rather consumer purchases of goods that may have been produced at different times.

GDP is not Demand
Another common mistake is to equate GDP with demand, such as the statement coming from none other than the chief economist at JPMorgan Chase, who said that this is a "pretty broad-based pickup in domestic demand." This also is not entirely true when we see that one of the components of the arithmetic definition of GDP as

GDP = Consumption + Investment + Government Spending + Exports - Imports

Includes the element "Government Spending" which reflects the amount of money that the various governmental entities spend on providing "services." Now, only a confused mind would equate the services of government, many if not all of which are foisted unto the public whether or not such public wanted them. So, in a strict sense, government services can not be equated with demand and therefore defining GDP as national or domestic demand is incorrect.

GDP does not represent the health of an economy
But the most troublesome, and perhaps misleading, interpretation is to take Gross Domestic Product as an indicator of the health of an economy. This is a common misunderstanding. Investopedia, a website that is presumably designed to give advice to investors, defines that GDP is one of the primary indicators used to gauge the health of a nation's economy. But, why is it wrong to equate GDP with an economy's health?

After hurricane Sandy hit the Northeast back in 2012, Forbes published an article pointing out that the devastation caused by the hurricane could reach $50 billion but "at the end of the day, Sandy may end up being beneficial to the U.S. economy." (Forbes, Nov 6, 2012). In addition to other comments touting how despite Sandy leaving "many casualties in its path...it could have a positive economic impact in the near-term." The conclusion one draws is that disasters are good for the economy since we should expect the post-disaster reconstruction and rebuilding to boost GDP. Somehow they just see the cost of reconstruction as a good thing but ignore the huge losses of wealth caused by the disaster. The economy is not healthier because of the post-disaster spending- it is poorer because what is lost can never be recovered.

The economists at Forbes, Goldman and similar outfits who focus on the growth resulting from a disaster, fall prey to the broken window fallacy. They only see the spending that occurs after a disaster but ignore two important things. One is the loss of wealth that occurs in a disaster that is much greater than the spending after the disaster. The other is the fact that the funds used in the post-disaster reconstruction have been diverted from other uses. The broken-window fallacy was cleverly discussed by the French economist Frederick Bastiat more than a century and a half ago (here is an article explaining the fallacy in a more recent context https://mises.org/library/broken-window-fallacy)

GDP does not reflect how an economic system works
Another misinterpretation is to take this definition of GDP as a true representation of how an economic system works. Thus, the equation becomes a tool that can be used to finesse the economy's performance. If GDP is falling, or even GDP growth slowing down, the usual prescription is to try to change one of the components, such as increasing government expenditures, and by definition the problem is solved. Such was the case after the 2008 recession when the Federal government engaged in extraordinary spending to boost GDP. But all this spending did not improve economic performance- GDP growth has remained anemic since then.

Unfortunately they do not realize that the economic system is not like a machine whose performance can be improved by moving some levers.

What is the alternative?
In reality there is not a single alternative to GDP. Not even the silly concept of Gross National Happiness that was introduced about 50 years ago in Bhutan, a country that ironically at that time was an absolute monarchy. The solution lies in taking a broader view and inspecting a number of economic statistics, such as employment indicators, production statistics, price information, etc. Only such a holistic view can give a true assessment of the health status of an economic system and whether the economy is prospering or not.

In a future post I will discuss Gross Domestic Output, an alternative measure that the Bureau of Economic Analysis has been releasing periodically and that can serve as a better measure of the nation's production output. 

JOB GROWTH - WHAT SHOULD WE EXPECT

Last week's release of employment figures for the month of August came in below "expectations," which brought further losses in the stock markets since the weak jobs figure does not provide any indication on the direction of the Fed's actions in the near future. While expectations hovered around 220-225 thousand new jobs for August, employment grew by 173 thousand jobs, a disappointing number. Moreover the private sector added only 140 thousands workers to its employment rolls, the lowest since March of this year when private employers added only 117 thousand new jobs. Year to date, total employment has increased by just under 1.7 million, this is over 10% below the comparable figure for last year, when employment through August already was 1.89 million.

Given the size of the U.S. economy we should ask not only the question of why are the employment numbers so low, but also whether those expectations are warrranted. Should employment in the U.S. grow by over 200 thousand workers month after month? Or should this figure be higher yet? This is an issue that I examine in this post and come to the conclusion that indeed we should expect employment to increase by more than 220 thousand workers, in fact historical data suggest we should be adding between 300 thousand and 350 thousand new jobs a month.

Strong Job Growth

When we look at number of new jobs created month after month, we get the impression that job growth since the end of the recession is comparable if not better than what we've seen in the past.The chart to the right displays the number of new jobs created annually since 1946 (the annual data are not calendar years but, rather, are calculated as the 12 months ended in August of each year, in order to include the latest data available.) We can see that in the last five years, 2011 to 2015, jobs have grown by a solid two million or more per year, this is better than any other five year period with exceptions- the 1990s for instance.

But we must realize that employment growth of two million when the total base of workers is around 140 million is very different than when employment is smaller than this level, as in the late 60s when U.S. employment averaged less than half of today's with fewer than 62 million workers total.

Weaker relative growth
Consequently, when we look at the number of new jobs compared to total employment, we get a different pattern; this is shown on the chart to the right. The top graph is the same as the one above, "U.S. Jobs Growth- 000s", except that we are excluding all years in which employment fell. The red line is a moving average that reflects a five-year trend.
The bottom graph displays the percentage change in employment, with the red line also indicating the five-year moving trend of the percentages. We can easily discern that employment growth since the beginning of the century is under 2% annually, which contrasts with that maintained in the second half of last century that averages nearly 3%.

What should be the job expectations number?
Summarizing the data into decades allows for easier visual interpretation. This is done on the chart nearby where we display percentage job growth in ten year periods since 1946- again we exclude all years in which employment fell.
We can see that job growth over the last ten years, at 1.7%, lags any other 10-year period since the end of the Second World War. Naturally the 4.3% growth seen by 1955 captures the robust private employment that absorbed all the soldiers discharged at the end of WWII. In the mid-1980s, the second highest period, reflects the impact of tax changes and other policies implemented in the early 1980s.
All in all, employment growth between 1946 and 1999 averaged 2.9%.

Thus we can calculate what job growth would have been in the last five years if we maintained this 2.9% average. This is shown on the table to the right.
On average, we should expect nearly 350 thousand new jobs added every month to stay in line with our historical growth. Last year, only three times did employment increase by more than 300 thousand jobs. The figure, which may seem high to some, should obviously be expected. The question that should be asked is why aren't we achieving these results more frequently? A proper answer requires an in-depth investigation of economic policies and their impact on employment and the nation's economy overall. But this is the subject of a future post.

U.S. GROWTH - WORSE THAN WE THOUGHT

Once a year the Bureau of Economic Analysis revises the Gross Domestic Product data series, from which the often-quoted GDP growth is derived. The revisions aim to improve the quality and accuracy of the data, and they are the result of a very extenuating evaluation of the source data used to calculate GDP.  The revisions typically show several major findings, however the media tends to focus on overall growth figure, such as the headlines following Friday's release of the second quarter, 2015 estimates:

"Economy bounces back: GDP grows 2.3% in second quarter (USAToday)"

"First reading on Q2 US GDP at 2.3% vs 2.6% expected (CNBC)"

this is all true. Reading further in those articles sometimes we may read commentary on the impact of those revisions, such as the latest one which resulted in a lowering of GDP for both 2012 and 2013. 

Although, as the bottom graph on the chart to the right shows, some quarters were revised upwards and others downwards, the net impact has been to reduce growth over the last few years. While previously average annual growth was pegged at 2.3% between 2011 and 2014, currently the estimate is for only 2.0%. These dismal figures reinforce the weak growth that the U.S. economy has had since the end of the recession, a full six years ago. 

Annual growth since the second quarter of 2009, when the recession was officially declared over, has averaged only 2.1%. This is close to European standards, the example that Krugman and other economists wish the U.S. should follow; that is, adopt policies like the European countries have favored for the last 30 years or so, and that have brought them continuous stagnation, high unemployment, and unbearable debt loads.

Failed Government Policies

But the sad truth is that all the "GDP boosting" policies of both the Federal government and the Federal Reserve Bank have failed. The Federal government debt has nearly doubled since the third quarter 2007, at the onset of the recession. At that time, debt amounted to $10.2 trillion, and it has jumped to $18.2 trillion today for a total increase of $8.1 trillion- this is an 81% increase in just seven years. To put it in a dramatic perspective, in seven years we've acquired debt equal to that incurred in the 226 years between the time the U.S. became a country, in 1789, and 2005- a remarkable feat. 

At the same time, the Federal Reserve Bank has increased what is misleadingly called its balance sheet, by well over $3.8 trillion. Just out of thin air, the Fed has purchased $3.75 trillion worth of U.S. securities since August 2008. That is, in the earlier period it held securities worth $479.6 billion, and today it is the proud owner of $4,231 billion of U.S. securities. It is interesting to note that nearly half of the U.S. government debt issued since the recession has been acquired by the Fed; that is, it has been monetized. 

But all of this spending and money pumping has not produced anything other than creating a stock market bubble. The impact on the economy has been minimal, at best. Actual GDP has risen by only 9% in total since the recession onset. Real GDP in the fourth quarter of 2007 was running at an annual rate of just under $15.0 trillion; it has risen to only $16.3 trillion since then. This translates into a 1.1% annual rate over the 30 quarters in this time. This is very poor performance indeed; both by itself and compared to our experience in prior recoveries. The bottom graph on the chart to the right shows the U.S. performance in all recoveries since the end of the Second World War, beginning with the 1949 recession. Since it's been 24 months since the end of the Great Recession (that should be called the "Lingering Recession" perhaps), we calculate average GDP growth, at annual rates, for the same period after each recession ends. The lowest average growth for all post-recessions is the latest one, at only 2.1% - clearly this is the worst by far of all other periods.

How Accurate are the Data?

One issue that is usually ignored in all the discussions on GDP growth is the accuracy of the statistics. Aside from the fact that they try to measure perhaps the wrong things, the revisions suggest that the data can not be reliably used as a guide for business. Take the first quarter of this year. The initial data release suggested that the economy had actually slowed significantly, in fact it had gone backwards since GDP shrank two-tenths of a percent (-0.2%) (what many economists state nonsensically as "negative growth," an oxymoronic word if I ever heard one.) But contrary to the initial release that the economy had shrunk in the first quarter, the revised figure tells us that in fact the economy grew modestly by slightly over half a percent. And these revisions are a common occurrence. I am not suggesting that I would want them not to revise the data, but that we should look at these figures with some degree of skepticism.
A few years ago, well actually many years ago, the economist Oskar Morgestern (see the brief biographical note below) wrote a book aptly titled On the Accuracy of Economic Observations. There he deplored the practice of government agencies issuing data that typically give the impression of being very accurate and precise, while they have a high degree of uncertainty. In all fairness, I should admit that the agencies usually footnote the sampling errors in the data, but they are not strongly highlighted. Analysis of the revisions to historical GDP data and their revisions, reveals that the growth rate for a specific period may be revised in the future by an average of 1.6 percentage points. For example, this means that a 2.5% GDP growth rate could end up being either as high as 4.1% or as low as 0.9%- which is a wide variation in fact.

EconLives
My plan for this blog was to provide brief biographies of economists from time to time. Let me start with Oskar Morgerstern.

He was an economist born in Germany  in 1902, grew up in Austria and studied at the University of Vienna, where he obtained a PhD in Political Science in 1925. After this he attained a scholarship from Rockefeller Foundation to study in the U.S., where he stayed until 1929. Subsequently he moved back to Vienna and taught at the University of Vienna for a few years until an invitation to visit Princeton University came in 1938. He was in the U.S. just about the time that Hitler took over Austria in the infamous Anschcluss, so Oskar decided it was wiser to remain here. He was a faculty member in Economics at Princeton until his retirement in 1970, when he took a position in New York University until his death in 1977 (like many people today he continued to work past retirement age!)
Besides the book on economic measurement mentioned above, he wrote jointly with the mathematician John Von Neumann the first book on game theory, titled Theory of Games and Economic Behavior, the book for which he is best known. Morgenstern was one of the economists in the "Austrian Schoool" of economics- a group known for voicing an economic theory radically different and opposed to the Keynesian paradigm. He worked with Ludwig von Mises, Friedrich von Hayek and others while in Vienna, although his work on economic theory tended to be more technocratic, and emphasized a mathematical approach that is anathema to the Austrian school. But at heart he was a strong believer in free markets and free association.

Game theory has been famously brought to prominence recently by Yanis Varoufakis, who was touted and feared as an expert in game theory when he was appointed as Finance Minister in the Greek government. Underlying all the media statements and opinions when Varoufakis was appointed, was the implication that the Greeks had now the upper hand in all discussions with the European Union, and the Euro group primarily, regarding the huge Greek debt load. Yanos had in game theory the silver bullet that would solve the problem. We all know now how it all ended up. The Euro group, dominated and led by the Germans, particularly by the influence of Wolfgang Schauble the German Finance Minister, crushed the Greek government's claims and forced them to surrender their position. Game theory met its match, German might.

EXPANDING WORLD...SHRINKING COUNTRIES

The recent news that Japan's population count continues to fall brought to mind the similar seemingly irreversible trend that other countries are facing, several of them in the developed first world. We see an scenario like Japan's playing for those countries over the next years. But also, more revealingly, many of these countries with falling population are in what was formerly the Soviet Union or its satellites, such as Cuba. Russia itself, still the 9th most populous country in the world, has seen its population drop dramatically since the fall of the Iron Curtain. However, as the chart nearby shows, Russia's population appears to have stabilized this decade- perhaps Putin's expansionary policies of slowly swallowing the Ukraine, after taking Crimea last year, may be working after all. But aside from this lull in the long term trend, Russia's population is projected to fall a further 2% by the year 2015.

Shrinking Countries
In total, we find that 23 countries, out of the 158 with population above one million inhabitants, will see their total population fall over the next 10 years. The majority of them, shown in light blue bars, were part of the former Soviet Union. In fact, only 4 out of these 23 are outside the former Soviet Union area. Most notably is Germany, the so-called economic engine for Europe, whose population 10 years from now will be about 2% lower. And poor, sad Greece, on top of its intractable economic debt problems, will see its population fall by another 1% over the next decade. This trend only compounds the likelihood that it will never be able to pay its debts.

Now a declining population is not necessarily a bad thing; in fact, if you are an ardent follower of Paul Ehrlich you'd think it's a good thing. But ignoring Ehrlich and his always-wrong predictions about the end of the world caused by high population growth and limited resources, the fact is that the declining population in these countries is accompanied with fewer working-age people who are expected to sustain its elderly folks. And this is where a crisis could originate.

Thus we find that many of these countries also face an "elderly population" problem, that is an increasing elderly population with all the potential burdens that this implies. Living longer is a blessing if one is a healthy individual; it could be curse if infirmities take over the body. Although there is no hard and fast rule at which point an elderly population becomes an onerous burden, we can assume that a critical point may be reached when this group exceeds one fifth, that is 20%, of the population. Given the relatively high unemployment rates in these countries, except Germany of course, combined with declining labor participation rates, we find fewer working people forced to sustain the elderly population (through taxes or debt to maintain the levels of support services required.

The chart to the right displays the percentage of the population that is 65 years and older for the 23 countries whose population is falling. Nearly half of them are above 20%, and several others are hovering just under this percentage.
The chart shows that leading all is Japan that by the year 2025 will have over 30% of its population aged 65 years and over. Germany is not far behind with fully one quarter of its population in this age group; Greece posts a percentage slightly over 23%.




Rest of the World
There are several other countries, twelve in fact, that also have a relatively high percentage of their population among the elderly. These countries are shown in the chart to the right, above the 20% horizontal line. But these countries have the advantage that their population is growing- this means that the number of working people to help sustain the elderly is not necessarily falling.
many countries, xx in fact, that also have a relatively high percentage of their population among the elderly, but at least they will see their population grow over the next few years.
We see that the United States falls in this group, with population growth of 8.1% over the next decade or just under one percent per year. Canada will have about 23% of its population in the 65+ years group, but has modest growth of 7% over the next ten years. But Finland and Italy, have nearly a quarter of their population in the elderly group and show very low rates of population growth- 2.8% and 1.2% each, respectively.

Is all downhill from here?
But there is some sunshine behind these gray clouds. Many of the elderly are not necessarily quitting the workforce altogether, since they are continuing to work. This is particularly evident in the United States where we find that the labor participation rate among the "65 year and older" group has doubled over the last 10-15 years (see my post for evidence: http://econlives.blogspot.com/2015/03/fewer-workers-must-we-worry-when.html.) Moreover, as Anthony de Jasay has pointed out recently, more elderly people will be able to work in the future as the nature of work will be much less demanding physically, he says "fewer and fewer jobs in the modern world call for much physical exertion for which the old would be unfit."

STATE OF THE NATION'S HOUSING - 2015

No, I didn't think of this post title myself, it's plagiarized from the latest report by the same name issued by the Joint Center for Housing Studies at Harvard, that I discuss here. This year's report is another of a long sequence of annual reports going back to the 1980s, where the Joint Center offers its analysis and views on demographics and housing in the U.S.

As always, the reports are well written and strongly based on facts and good analysis, highlighting key events in the housing markets during the previous year and where things stand today. Following are a few key points taken from the report, that you can download for free here (http://www.jchs.harvard.edu/research/state_nations_housing).

The report is divided into five sections, led by an executive summary and ending in an appendix of data tables. The five sections cover the following areas described in the chapter titles: Housing Markets, Demographic Drivers, Homeownership, Rental Housing and Housing Challenges. The data appendix is available in Excel format, which is always a nice and convenient gesture. An overview of each section follows, ending with a brief critique of my own.

Housing Markets
In a retelling of last year's housing market, they point out that its contribution to GDP of just 3.2% is significantly less than the 4.5% average since 1969. Home improvement expenditures, that peaked at about half of the total residential construction spending, was down to a third of the total. Both new and existing home sales were weak last year, relative to their volume in the early 2000s, although they were already above the recession lows in 2008. However, the housing markets last year slowed down relative to the modest recovery in the previous two years.
Many homes are still stuck in the foreclosure process, with an estimated 920 thousand units in foreclosure. These homes in foreclosure, combined with homeowners who can't move because they have little equity in their current home (thus being unable to come up with the required down payment) or are underwater- 10.8% of homeowners fall currently in this category.
Further, the lower residential mobility due in part by aging of the population is reducing the inventory of homes for sale. (For details on mobility trends see my post http://econlives.blogspot.com/2015/03/are-we-becoming-sedentary-nation.html)
Their outlook for the housing market is that the "...recovery is likely to continue at only a moderate pace until income growth picks up and rising home prices help to reduce the number of underwater and distressed homeowners."

Demographic Drivers
Two well-known trends are the focus in this section: aging of the U.S. population and the rise of minorities. The pressures of these two trends will change the dynamics of housing in the U.S. The majority of household growth in the next decade, 76% according to Joint Center calculations, will be due to minorities; this will rise to 85% in the next twenty years. The foreign born represent a significant source of housing demand, accounting for nearly a third in the 2000s. Event hough immigration slowed down after the 2008-09 recession, net international immigration jumped to just under a million last year. Interestingly, the Joint Center reports that Asians make up now the largest shared of immigrants while Hispanics, particularly from Mexico, continue to lose share.
The report also points out that although median real household income has rose 2% between 2012 and 2013, to $51,900, it still is 8% below its 2007 peak, and in reality equivalent to 1995 income. And median household wealth is, in real terms, still 40% from the 2007 peak and at its lowest level since the 1990s. The fall in wealth is due mainly to the losses suffered in the housing crash. The median home equity in 2013 was nearly a third below that of five years before.
Even though households' home equity has improved, many are still burdened with huge student debt. The Center indicates that 20% of all households had student loan debt in 2013, more than double the rate of 25 years before.
The Joint Center is calling for a growth of about 1.2 million households annually in the next 10 years. But they warn about the 42% rise of older households (over 65 years of age) and the doubling of those 80 years and older. This "...will test the ability of the nation's housing stock to address the spiraling needs for affordable, accessible and supportive units."

Homeownership
Although homeownership is not covered in detail until the fourth chapter, this is first topic discussed in the Executive Summary. The main point is the disastrous decline in homeownership since the housing crash in 2004, to the current rate of 63.7%- the lowest it's been in more than twenty years. Plaudits to me for having discussed this issue in an earlier post in this blog (http://econlives.blogspot.com/2015/06/fewer-homeownersmore-renters.html), so nothing new here, at least for me or anybody else who may have read my post.

The Joint Center report, however, points out that a further reason for the decline is the inability of many people to obtain mortgage loans, due to more stringent standard followed by lenders, who were bitten after the housing boom.
The report concludes this section saying that most households "... regardless of race/ethnicity, age, and lifestyle - still consider homeownership a positive goal." Surveys conducted by Fannie Mae reveal that 82% of respondents think that owning made more financial sense than renting. So the only constraint to a recovering of the homeownership rate is whether households can obtain the means to achieve it.

Rental Housing

The report indicates that the flipside of declining homeownership is a concomitant increase in rental housing. The chart to the right, also taken from my earlier post, clearly shows this phenomenon.
But the Joint Center report further illuminates how a large number of single family units are taking the role of rental homes. In fact, the single family units share of rental market has risen from 31% in 2004 to 35% last year. That is, the supply of rental units is not met by multifamily structures alone, but also single units.
An interesting point regarding this is that large rental companies have been purchasing many of these single units to use them as rental. But, as was pointed out during the web conference, it's still an open question whether those rental companies can manage well those units given that it's difficult to standardize and apply the same practices across all units, as you would do in a multifamily building where all the units are very similar.

One of the valuable traditional roles of these reports is their evaluation of the policy implications of the current state of affairs in housing. This year's report is not different. Although the number of households with high house cost burden has fallen, this improvement comes from the homeowner side; primarily due to falling mortgage costs and modest income gains (p. 30). But for renters, the situation is not better- particularly for low-income renters. They recognize the continuous need of good quality rental units that are within the financial ability of renters. The report does not provide any specific advice on how this can be achieved, other than it "requires the persistent effort of both the public and private sectors."

Housing Challenges
The main challenge is the heavy cost burden for many renter households. While the burden for homeowners eased a bit, first because many lost their homes to foreclosure and then low interest rates reduced their monthly payments, the burden on renters has increased. The Joint Center finds that just under half of all renters fall in this category, that is their rental payments take 30% or more of their paycheck, thus cost-burdened renters reached a high of 20.8 million households. High rental costs leave those households with little to spend on food, clothing and other things naturally.

Additionally, even though housing may take a large share of their income it does not ensure that housing will be adequate; that is, housing with deficiencies in plumbing, electrical and heating systems. This is the second challenge posed by the Joint Center in its report. About 10% of renters who earn less than $15,000 live in inadequate housing. The supply of housing for low-income households is also wanting. The Center reports that in 2013, 11.2 million low-income renters (that is, earning less than 30% of the area's median income) competed for the 7.3 million affordable units- this leaves a shortfall of 3.9 million units.

The solution proposed is more housing assistance, either by tax credits or subsidies, and also a capitalization of the National Housing Trust Fund. They point out an advantage of this fund is that it is not subject to annual appropriations but, rather, has a predictable stream of funding.

Any Criticism on the Report?
The only thing that seems to be missing from this report is an evaluation of the impact that regulations, both building code regulations and financial ones imposed by the Dodd-Frank bill, have on low-income housing and housing overall. Each individual building code has its own merit indeed, who wouldn't want to not use safer materials, for instance? But what is the combined effect of all those codes, both national and local, on building costs? Similarly, the 2,300 original pages of Dodd-Frank bill have already spawned about 14,000 pages of regulations, many of those impact mortgage lending through additional paperwork. What are the additional costs on a house or rental unit?
But maybe this analysis is out of the purview of these Joint Center reports.

RISING EMPLOYMENT BUT FLAT INCOMES, WHY?

The last two months' employment reports have been hailed in some quarters as a sign that the economic recovery is finally on. At the same time consumers' income continues to be stubbornly flat, if not declining. What is going on? Shouldn't more working people lead to higher incomes? We hear about the 10.7 million jobs created since the end of the recession (somehow attributed to the magnanimous hand of the government) but little is said of the fact that most of those "new" jobs are simply a catch-up to the employment losses suffered during the 2008-09 recession. In fact, only 3.3 million of those job gains truly represent new jobs, that is jobs over and above the number of people employed in January 2008 right when the recession hit. In this note we will review some explanations of this apparent disconnect between job and income growth.

Employment Growth Data Are Misleading
Currently, national employment is only 2.4% above the pre-recession peak of 138.4 million employed in January 2008. This growth translates to a dismal rate of only 0.8% per year, far below the 2.3% annual growth rate maintained between 1940 and 2007. Also since the end of the recession, U.S. population has increased by 5.9%- that means that employment growth is not even keeping up with population growth.  The chart nearby compares the average annual employment growth over the six years from the 2008-09 recession, to similar 6-year periods after each of the recessions since 1960. It can be seen clearly that the current recovery, as well as the post-2001 recession one, are far below par.

Many States Continue to Fall Behind
Underlying the slow pace of employment growth are several states that still have to regain the losses suffered during the 2008-09 recession. We find that 15 states still show a gap to the pre-recession employment peak. These 15 sates represent nearly one quarter of total U.S. employment, accounting for 34 million jobs. Leading the pack is Nevada that first enjoyed tremendous growth during the housing bubble years, only to see its economy collapse when the housing market crashed. The state had the highest rate of foreclosure filings in the nation in 2010, with an astounding 9% of all housing units in the state in foreclosure- that is, one out of 11 houses.
Second in line is Michigan, still reeling from both the housing crisis and the collapse of its auto industry, with two of its three automakers being forced to take advantage of the Obama's stimulus plan. Other states in similar straits are listed in the chart.

More New Jobs in Lowest Earning Sectors

A key reason for low income growth, and lackluster GDP growth, lies in the fact that the largest employment gains are in sectors that generate the lowest earnings. Nearly two-thirds of the new jobs created since the beginning of the recovery, six years ago, are in the four lowest paid sectors. The sharp path in job growth for these four sectors is shown in the chart nearby.
Yes, the number of workers in these sectors has been increasing rapidly, but little mention is made of the fact that these same sectors and jobs are among the lowest paid.



A simple graph showing average weekly earnings by sector against the relative contribution of each sector to total employment growth provides a clearer view. On the chart to the left, we can see that the sectors with the highest contributions to growth, highlighted in read, are also the ones that generate the lowest earnings.
The sector with the lowest weekly earnings, Leisure & Hospitality, contributed nearly one-fifth (19%) of the job growth since the end of the recession- that is 2.0 million jobs. But the average weekly compensation of these workers does not break the $400 mark. Similarly, Waste Services generated about one in seven jobs each barely making above $600 a week.
Other sectors with high growth but low earnings are Retail Trade, 10% of jobs at an average of $548 a week; and Health Services, with slightly over 19% of the new jobs although paying slightly over $800 a week. All in all, these four sectors generated 6.97 million jobs since June 2009, or 65% of the total 10.7 million jobs gained over that time.

Such Growth Does Not Lead to Prosperity
It is not only jobs, but high earning jobs that lead to prosperity. Although I do not explore here the reasons behind the fast growth of these low paying sectors, it seems that impediments set governments via regulations are stymying robust growth in some sectors that happen to generate higher earnings. Without making a judgement on the value of such regulations, we can readily see for instance that high-paying sectors such as mining or manufacturing have traditionally attracted heavy government regulations. Employment in coal mining has fallen from 90 thousand in 2012 to about 70 thousand today- efforts to move away from coal are having an impact, and the average earnings from coal mining are over $1,500 a week. Despite restrictions on off-shore oil exploration and limits on oil exports, the oil industry has moved in the opposite direction to coal's. Thanks to fracking, oil exploration employment has increased from 124 thousand in 2004 to nearly 200 thousand today; this industry generates weekly earnings of nearly $1,800.

FEWER HOMEOWNERS...MORE RENTERS

The U.S. homeownership rate has dropped sharply as a consequence of the excesses that led to the housing crash of 2004-2008. The chart to the right, taken from an earlier post in this blog ("Homeownership Rate...Back to the Future",http://econlives.blogspot.com/2015/05/homeownership-rateback-to-future.html), shows how the rate fell by almost five percentage points over the last decade, to its current level of 63.7%. A declining rate, however, does not necessarily imply that the actual number of homeowners also declines, since an increasing number of households could probably compensate for the lower rate, that has occurred in the past. But this is not the case currently, both the rate and the number of homeowner households has fallen.

House Prices Won't Fall They Said...But They Did Fall.
Back in 2004, who remembers?...Google of course, many thought it highly unlikely that prices would fall nationally. For instance, an economist at Wachovia Securities, swallowed by Wells Fargo since then and probably the quality of their forecasts was one reason, said that "housing prices could slide back somewhat...I don't think they will plummet." Also, Mark Gongloff a writer at the all-knowing, all-reliable CNN Money stated that "Home prices don't often fall nationwide. It last happened to new home prices in 1991, and things were considerably different then...the oversupply of homes, which stretched back to the late 80s helped sink prices, but no such oversupply exists today." So was the conventional thinking before the fall. An elementary understanding of economics would have told him there are other causes behind price fluctuations besides "oversupply."


It is well known that many of the houses sold in the first half of the last decade, both new and existing houses, were to consumers who couldn't afford them. Also, most consumers purchased them under the assumption that forever rising house prices would make those house purchases a solid investment. This proved to be not so. Nationally, home prices fell 25% between 2007 and 2011, with the biggest declines in 2008 and 2009.

The precipitous drop in house prices resulted, as we now know, in a huge number of homeowners who found themselves "under water" with their mortgages. Additionally, as the recession set in, many who lost their jobs couldn't meet the monthly house payments and this led to the foreclosure crisis- with the number of foreclosures reaching nearly 2.5 million in 2009. Foreclosures have declined over the last few years, although they still hover around half a million homes annually; this compares unfavorably with the figures before the recession when around 150,000 foreclosures were recorded per year.

All of these factors, falling house prices, dropping wealth, the number of foreclosures rising, etc. have impacted the dynamics of owning or renting a home.

Household Formations are Down

Last year, the total number of households in the U.S. reached 115.5 million, an increase of 792 thousand from 2013. Although this is a remarkable 51% increase over the prior year, the number of new households in 2014 is still far lower than the average maintained over the 40-year period from 1960 to 2000. Over those forty years, the number of households increased by an average of 1.3 million a year.
The chart to the left shows that, since the onset of the 2008-09 recession, the number of new households has averaged just under 600 thousand per year (shown by the red line), this is less than half the average maintained during the last four decades of the last century. And fewer new households implies, naturally, fewer new houses are needed.

More Renters, Fewer Homeowners

The net result is that since the onset of the housing crash, and the general economic recession that followed it, we have seen the actual number of homeowners fall, while the total number of renters has increased.
As the chart "Number of Homeowners & Renters" shows, we had by 2014 1.7 million fewer homeowners than in 2006. In contrast, the number of renters shot up dramatically by 6.4 million households. This, as can be surmised, is different from the pattern we were used to seeing in the past, when both the number of homeowners and renters increased.

Younger People Shying Away From Homeownership

Unlike previous generations, where young adults would try to purchase a home as soon as possible, some even before getting married, currently we see that a majority of them are opting for renting. There are many reasons why they are making that choice now. Among them must be the inability to get credit given the large education debt load they carry. Also, many of them are staying away from the labor force altogether- witness their declining participation in the labor market. Additionally, we can't dismiss the fact that the charm of owning a home may have faded, since homeowners can't accumulate as much real estate wealth as during the housing bubble years. The chart nearby shows that the number of homeowners under 55 years old has fallen, with the largest declines observed among two groups: 25 to 34 years and 35 to 44 years. It is only among those headed  by people over 55 years that we see homeowners rising more than renters. 

Moreover, the under 25 years set has fallen for both owners and renters. This is consistent, again, with the precipitous decline in labor participation among people in this age group. They are the ones who have moved back to their parents homes, and are living in the basement playing video games.

Implications of This Trend

We've been seeing already some of the effects of this new dynamic. For instance, multi-family housing construction has recovered faster and more robustly since the recession. While single family construction rebounded by 46% since its low point in 2009, building of multi-family units has shot up by 226%. Also, while prior to the recession between one quarter and one third of the multi-family units were built as condominiums, that is not for rent, that proportion has fallen precipitously over the last four years. We find that, since 2010,  only 8% of the multi-family housing units are built for sale, the vast majority are designed to be rental units. But the average size of those rental units is under 1100 square feet- pretty much the size prevalent in the early years of the century.

More importantly, these trends also mean that the home improvement market in the future will grow less than otherwise. Rental units are remodeled less frequently than homeowned properties and, since they are smaller than owned homes, the amount spent on remodeling is going to be smaller. Thus, in general we should expect fewer remodelings and fewer funds spent on those projects.