Capital Economics Examines Housing Recovery’s Impact on Growth

While the economy has already seen a slight bump from homebuilding, researchers from ""Capital Economics"":https://www.capitaleconomics.com/ contend the burgeoning recovery may provide even greater lift to gross domestic product (GDP).

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In the firm's latest U.S. Economic Update, senior U.S. economist Paul Dales says the recovery in residential building contributed 0.3 percentage points to last year's 2.2 percent rise in GDP. Last year was the first year since 2006 that new home construction didn't directly subtract from GDP growth.

At the same time, Dales notes the rise in home prices provided an indirect boost to economic activity by supporting consumption, ""both through the so-called wealth effect and the return of positive housing equity withdrawal.""

In addition, recent developments have further highlighted the impact of the recovery on the larger economy, particularly in manufacturing output and employment. For example, Dales points to the annualized growth rate of output of construction supplies, which swung from a negative three-month rate of 8.8 percent in July to positive rate of 17.6 percent in February. Additionally, Dales noted a 5.9 percent increase in output of household appliances, furniture, and carpets--""not quite as impressive, but ... still a result of the housing recovery,"" he says.

At the same time, payroll employment of construction workers rose at a three-month-on-three-month annualized rate of 6.7 percent in February, while employment at building materials stores rose 2.9 percent, and the number of real estate brokers rose 1.8 percent.

""[H]ousing-related jobs have made a more significant contribution to the recent gains in employment. The number of housing-related jobs rose by an average of 45,000 per month in the three months to February, accounting for a quarter of the 191,000 average rise in total employment,"" Dales writes. ""A good chunk of the recent pick-up in job growth is therefore due to the strengthening housing recovery.""

Dales concludes by noting that Capital Economics' forecast for GDP growth in 2013--2 percent--assumes that housing will add about half a percentage point to growth. While lingering fiscal uncertainty and the euro-zone crisis may disrupt that growth, ""[t]he possibility that the housing recovery proves to be stronger than we expect is perhaps the most significant upside risk to [Capital Economics'] forecast.""