Housing Starts: A Leading Economic Indicator of a Recession?

This Activity Exercise is appropriate for Principles of Macroeconomics, has no class size limitations, and is designed for completion in one 50 minute class period. The preparatory work can also be captured and evaluated by the instructor. It is the fourth in a sequence of five Activity Exercises designed by the author to explore basic macroeconomic principles and their measurement. The five Activity Exercises are: Unemployment Rate (1), Consumer Sentiment (2), Gross Private Domestic Investment Spending (3), Housing Starts Leading Indicator (4), and Investment Spending Multipliers (5).

Students will need to be familiar with using and manipulating Federal Reserve Economic Data (FRED). See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Overview

The Activity Exercise Housing Starts: A Leading Economic Indicator of a Recession? can be used as an applied exercise for the measurement and the overall significance of new home construction for American economic growth. Ideally, preparation for the AE will familiarize students with the role of residential home construction in the Gross Private Domestic Investment component of the real GDP. The Activity Exercise asks students to apply that understanding to a specific case that connects the market conditions faced by a private bank to business cycle changes at the macroeconomic level.

Expected Student Learning Outcomes

At the completion of this Activity Exercise, students will be able to describe how changes in the level of Residential Home Construction are a leading indicator of changes in the Real Gross Domestic Product.

Information Given to Students

A year from now you are an intern in the small business lending department of a bank. A fellow intern states that she read in the Wall Street Journal how a decrease in New Privately Owned Housing Units Started (HOUST) in one quarter predicts a decline in Real GDP a year or more later. She said that the WSJ article referred to Residential Home Construction as a Leading Indicator of a future recession. You decide to investigate whether Residential Home Construction has been a Leading Indicator of Recessions over the past few decades. After consulting the data, you conclude that:

A. Since 1998, a decrease in HOUST has ALWAYS been a Leading Indicator of a future recession.
B. Since 1998, a decrease in HOUST has SOMETIMES been a Leading Indicator of a future recession.
C. Since 1998, a decrease in HOUST has NEVER been a Leading Indicator of a future recession.
D. Since 1998, a decrease in HOUST is ONLY a Leading Indicator in predicting a future economic expansion.

Housing Starts: A Leading Economic Indicator of a Recession? (Microsoft Word 2007 (.docx) 127kB Jul16 18)

A. Is the correct answer. There will be a big debate with B, since the decrease just before the 2001 recession is very small.

B. A precipitous decline here, which can be backed by student recollections of the popular film "The Big Short."

C. Not true.

D. Not true.

Instructor can elect to lead students through the process of creating the appropriate FRED chart, or have students perform that as a prep exercise.See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Suggested Debriefing Discussion Questions:

Why are Housing Starts an important indicator of turning points in the business
cycle?
What kinds of demand does new home construction create in the national
economy?
What kinds of employment and income does new home construction create in the
national economy?
Why is new home construction included in the Gross Private Domestic Investment
category of the Real GDP?

Students should be able to articulate the importance of new housing starts for growth in the real GDP. Instructor evaluation can be formulated through formal examination questions or presentation.

Read Burcu Eyigungor, "Housing's Role in the Slow Recovery," Federal Reserve Bank of Philadelphia, 2016

PREP ASSIGNMENT (may be submitted in advance):

Instructions for accessing and manipulating FRED data are found in "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. ) .

Access the FRED chart of data for New Privately Owned Housing Units Started (HOUST)

Reformulate HOUST to 1998 to present.

Save the completed chart for future reference.