On Tuesday of this week, Kash of AngryBear made an observant quip which has caught fire in the center-left economic blogosphere:
Month by month, the non-service portion of the US economy has slowly been evolving from a goods-producing economy into a house-producing economy...Brad Setser picked up on it and so did Brad DeLong. In fact, the quip even made it onto Business Week's blog.
Indeed, housing has become the cornerstone of the US economy since the popping of the tech bubble. In 2001 and 2002, residential fixed investment was the only expanding investment sector, and even in 2003 housing absorbed over half of all US fixed investment. The last time we saw such a condition was 1992, but that followed four straight years of declining investment in housing and was simply a one-year blip on the screen. Before that we're back to the mid-80s when housing again dominated the American investment scene. Yet back then, residential investment never contributed more than 5.0% of GDP whereas since 2003:I housing has steadily contributed more than 5.0%.
In 2005:I this level grew to tremendous levels: 5.8% of GDP, a figure not seen since 1978, and before that all the way back to 1955. Of course, the difference between now and then is that then the US economy did not rely so heavily on consumer spending. Housing plus consumption totaled around 68% of GDP; in 2005 we're at 76%. Considering so much contemporary consumption is fueled not by rising wages/salaries as back in 1978 or 1955, but instead by withdrawing home equity, the reliance of the entire US economy in 2005 on housing is incredible.
And one shouldn't forget the relative demise of the production of things versus the production of houses since the 1980s, much less since 1978 or 1955. In 2004 all manufacturing industries contributed just 12.7% of industry value added in the country, down from 17.2% as recently as 1988. Construction and real estate services combined have grown from 15.8% in the early 1990s to 17.0% in 2004.
The magic, of course, is that the US has figured out a way to sell our houses to anyone and everyone via mortgage-backed securities, especially as an export. So the US buys foreign goods and sells our housing stock in exchange. As we run larger and larger goods deficits and smaller and smaller services surpluses, we need to build -- and export -- more and more houses! The shift of the non-service sector of the US economy away from producing goods is simply the flip side of the move toward producing houses instead. They go together, hand-in-hand.