Housing is the Business Cycle

From a new NBER paper, housing is the business cycle:

Of the components of GDP, residential investment offers by far the best
early warning sign of an oncoming recession. Since World War II we have
had eight recessions preceded by substantial problems in housing and
consumer durables. Housing did not give an early warning of the
Department of Defense Downturn after the Korean Armistice in 1953 or
the Internet Comeuppance in 2001, nor should it have. By virtue of its
prominence in our recessions, it makes sense for housing to play a
prominent role in the conduct of monetary policy. A modified Taylor
Rule would depend on a long-term measure of inflation having little to
do with the phase in the cycle, and, in place of Taylor’s output gap,
housing starts and the change in housing starts, which together form
the best forward-looking indicator of the cycle of which I am aware.
This would create pre-emptive anti-inflation policy in the middle of
the expansions when housing is not so sensitive to interest rates,
making it less likely that anti-inflation policies would be needed near
the ends of expansions when housing is very interest rate sensitive,
thus making our recessions less frequent and/or less severe.


  1. Nice find.
    I am gonna make it part of TBP’s Housing Day!

  2. I don’t really care if 8 recessions were preceded by housing problems. What would be relevant is the percentage of of the time that housing problems resulted in recessions. I guess you have to buy the article to find that nugget.

  3. There’s plenty of data on this subject.
    See these examples:
    Housing Leads the Economy Up AND Down
    Home Starts and Recessions

  4. I agree with Don. Give us the number of false positives man.