Employment Will Plummet:
(June 13, 2006)
UCLA's Anderson Forecast predicts 800,000 jobs will be lost as the housing bubble bursts. A look at the actual numbers suggest they've grossly under-estimated the real damage to come.
EDIT: I skipped all the number crunching. Len.
Given the 7 million non-union jobs in construction and another 8 million in housing-dependent fields, the UCLA report seems absurdly optimistic. the 500,000 jobs the report estimates will be lost in construction means the collapse of the housing bubble will leave fully 93% of the construction workforce fully employed? Does that sound realistic? The report forecasts a scant loss of only 800,000 jobs out of the total housing-dependent wrokforce of 18 million, a mere 4.4%. Does this sound realistic?
Let's look at the realities of the housing-dependent industries:
When housing tanks, it doesn't decline; it dries up and blow away. With builders already sitting on unprecedented inventories of unsold houses, does it really make sense to think housing starts will decline by 10% and construction employment will decline by only 7%? Experience suggests housing starts will fall by half or more, and employment will track that decline. If housing starts fall in half, then we can expect 3.5 million jobs lost in residential construction, not 500,000. Frankly, you have to wonder why developrs would go to the trouble of building any new homes when the homes already for sale and in the pipeline are already so far ahead of demand.
The same is true of the mortgage and real estate industries. They don't decline by 7%, they dry up and blow away. Sure, there will still be realtors and mortgage brokers, but their ranks will be thinned by at least a third (a conservative estimate). That would likely total well over 1 million job losses in those industries alone, three times the absurd UCLA estimate.
The same is also true of sales of carpeting, appliances, furnaces, doors, windows, etc. A sharp decline in housing starts will immediately impact sales and jobs. Yes, people will still be buying new doors, windows and countertops for remodeling, but with their house value declining monthly, how many people will undertake an expensive remodel once they grasp it won't reverse the decline in their house value? The obvious answer: Not many.
As the first chart shows, construction jobs have been a significant factor in employment throughout the nation, not just in bubbleland locales like Florida and California. If construction jobs are so important in Montana, imagine what they mean to Florida.
Unlike the consumer electronics industry, most construction-related manufacturing is domestic. If sales of iPods, for instance, fall in half, that will marginally hurt store sales at retailers and shippers and workers in the Asian factories where the gizmos are made, but the only real damage would occur in Apple HQ in Cupertino, which employs a few thousand people. In other words, a drop of 50% in IPod sales would have a negligible effect on U.S. employment.
Compare that to a 50% drop in construction spending. You're not just taking out the onsite construction jobs but the folks making the carpets, the truckers hauling lumber, the millwork employees, the door manufacturers, the furniture and appliance workers--the list goes on and on. While many appliances are now made in Mexico, the majority of the products and services which go into residential housing are domestic--meaning when the drop comes, it will have a devastating effect on a huge swath of American industries and their employees.
And then there's tax receipts. What happens to government employment when all those transfer fees, payroll and capital gains taxes decline? Clearly, the gravy train of lush taxes which has been pouring into local government coffers will dry up. And since most local government can't borrow money to make payroll (California excepted, of course), then government employment will also decline along with tax revenues.
Put it all together and an estimate of 5.6 million jobs lost seems more realistic than a mere 800,000. That works out to 5% of total private employment in the nation. Does 5% of the total workforce losing their jobs seem extreme? If you accept that 3.5 million construction jobs out of 8 million are likely to vanish, and a million real estate and lending-related jobs will disappear, that's already 4.5 million. If you consider the millions of manufacturing and retail jobs which are housing-dependent, then it's no stretch to reckon another million jobs will be lost as housing starts and renovations plummet. And there's your 5.6 million jobs lost. As those paychecks vanish from retail and leisure outlets, doesn't it make sense that employment in those areas will fall along with sales? When you consider the entire chain of spending which flows from housing, it's not hard to imagine even more jobs falling by the wayside as consumer spending falls.
And if 5 million people lose their jobs, what happens to the economy? Recession. The UCLA report got one thing right.
Warren Buffet: 5 minutes and 17 seconds of pure, unadulterated, bulletproof, flawless logic.
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