Chicken/Egg Cont.

More on residential investment. This has been a great leading indicator of the current recession, and doesn't portend any recovery in the near future. Once we see improvement in this metric, which won't happen until we have worked through the excess inventory on the market, we can finally expect job numbers to improve. Below is residential investment as a percentage of GDP over the past decade.

RI % GDP

It appears that the typical percentage was around 4.5% before the bubble, rose to 6.2% at the peak, and has dropped to around 2.5%. We have lost around 2% of GDP directly and perhaps significantly more assuming a reasonable multiplier effect.

For more on the impact of residential investment on the economy, see Edward Leamer's 2008 paper Housing IS the Business Cycle, which expanded upon RK Green's 1997 paper on the same topic entitled Follow the Leader. This work should be far more popular given its clear evidence of residential investment's enormous impact on the American economy. Considering what I was taught in undergrad macroeconomics a few years ago, it seems that the field hasn't fully assimilated this work.