Monday, October 30, 2006

Krugman on Housing, Using Taco Sales to Predict the Economy

I had an enjoyable dinner with New York Times columnist and Princeton Econ Prof, Paul Krugman, last Thursday. I also got to meet some of my colleague dismal scientists who teach at various local colleges. Much of the econotalk at dinner centered around the housing market and its effects on the macro economy. Soft landing (slow growth) versus hard landing (recession) is the question of the day for macro forecasters.

In the middle of dinner, Professor Krugman excused himself for a minute, and whipped out his laptop computer. It turns out that he was putting the finishing touches in the column in the New York Times that would appear officially in the next day’s paper. By the time I returned home from the dinner on Thursday night at 10 p.m., the column was already incorporated in the online edition of the Times, and the subject of intense debate in the blogosphere. The world is really is flat. I dream of using Web 2.0 technology to teach online from a nice beach in Thailand.

In today’s New York Times, Professor Krugman gives his take on housing in an article called: “Bursting Bubble Blues.” I am going to excerpt part of the article since to read the whole thing you have to subscribe to a service called Times Select.

Here are some excerpts from today’s Krugman piece.
“Over the last few years, most good U.S. economic news has been the result of soaring home prices. Spending on new houses created jobs and poured cash into the economy. Consumers borrowed against the rising values of existing homes and went on a buying spree, spending more than they earned for the first time since the great depression.
But the housing boom became a bubble, fueled by a surge of irresponsible bank lending, which continues even now…The question now is how much pain the bursting bubble will inflict.

Last week’s report on G.D.P. showed the first signs of serious economic damage. According to the “advance” estimates (which are often subject to major revisions), growth in the third quarter of 2006 slowed to its worst level since early 2003. A plunge in spending on residential construction, which fell at an annual rate of 17 percent, was the main culprit. But was that just a temporary setback or the beginning of something much worse?

Some say the worst is already over. Mr. Greenspan, who’s been an optimist all the way, now argues that the latest data on new-home sales and mortgage applications suggest that housing has already bottomed out. Business investment is still growing briskly, and so far consumers haven’t cut their spending. So maybe this is as bad as it gets.

But I think the pessimists have a stronger case. There’s a lot of evidence that home prices, although they’ve started to decline, are still way out of line. Spending on home construction remains abnormally high as a percentage of G.D.P., because banks are still lending freely in spite of rapidly rising foreclosure rates.

This means that home sales probably still have a long way to fall. And you don’t want to make too much of the fact that some housing indicators have turned up; those indicators tend to bounce around a lot from month to month.

Moreover, much of the good news in the latest economic report is unsustainable at best, suspect at worst. Almost half of last quarter’s estimated growth was the result of a reported surge in automobile output, which some observers think was a statistical illusion, not something that really happened.

So this is probably just the beginning. How bad can it get? Well, you don’t have to go far to find grim forecasts: Merrill Lynch predicts that the unemployment rate will rise from 4.6 percent now to 5.8 percent by the end of next year.”

But you may object to Krugman’s analysis. We live in The OC, and The OC is different. Jon Lasner, an entertaining and knowledgeable business writer at the OC Register has an informative real estate blog that you can access here. In fact, Jon Lansner is known to read the economic tea leaves at a taco stands. See Lasner’s article: “Weak sales at Mexican fast-food chains suggest sluggish overall economy.” Meanwhile Cal State Fullerton (CSUF) economists predict that the O.C. economy will slow through 2007, and housing prices will drop. Even The OC is not immune from macro forces.

Extra Credit: Who is widely considered to be the founder of macroeconomics as a separate branch of economics? If you are the first student to send me an e-mail ( with the answer, you will be rewarded with two extra credit Discussion Board points. Only two points extra credit per student can be earned in any given week from the blog questions.

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