Drop in Housing Starts Indicates Unemployment Is Headed to 9%

Where is the economy headed? Some “experts” say the economy is ready to rebound, after a short contraction. Others think that the economy is just at the beginning of a long and painful recession. However, the truth may be hidden in data that tracks housing starts, according to University of San Francisco business professor Jon Fisher, who previously founded and sold his online authentication company Bharosa to Oracle. Fisher contends the unemployment rate may be headed to 9 percent. Fisher says that history shows that as the number of new housing starts drops, the unemployment rate rises shortly thereafter. After analyzing new housing start data, in the next 12 months, Fisher says the U.S. could see unemployment rates as high as 9 percent, a rate not seen since 1983. “This is important data given the number of layoffs projected on Wall Street,” Fisher wrote in an email. “I think the numbers are a fraction of what we're going to see.” Numerous Wall Street firms have already announced layoffs totaling more than 83,000, including 15,500 from Citi, while New York City estimates it will lose 33,000 jobs in Manhattan alone. However, by the end Q1 2008, the impact was yet to be seen. According to Rob Hegarty, Managing Director and Practices Leader, Securities & Investments and Insurance at TowerGroup, financial services firms actually increased staff globally since the end of 2007. On Dec. 31, 2007, Hegarty said in his presentation at the 2008 TowerGroup Annual Financial Services Business & Technology Conference and Exhibition in Boston, firms had 856,000 employees and by the end of March this year, there were 865,000 employees. Granted, many of the layoffs actually took place in late March and in April-May, so the numbers may be slightly off. University of San Francisco’s Fisher maintains that the drop in housing starts is a good indicator as to where the unemployment rate is headed and that Wall Street won’t be immune to further drastic reductions. He writes: “The following chart is a plot of new U.S. housing starts (white line) and unemployment (red line) over the last 50 years. Historically, when new U.S. housing starts have plunged, unemployment has surged in the following year.” “In 1974, new U.S. housing starts plunged from 2.5M to less than 1.0M units followed by a surge in 1975 unemployment from approximately 5.6 percent to more than 9 percent. The same pattern may be seen starting in 1968, 1978, 1985 and in 2007.” “Perhaps 2007 will eventually mark the steepest and greatest decline in new U.S. housing starts in U.S. history yet 2008 unemployment, recently revised upward by the FED to 5.6 percent, has yet to spike.” “We are exactly where we were in 1975 before an unemployment surge to more than 9 percent or before an unemployment surge to 11 percent (1981) or before an unemployment surge to 8 percent (1991). The FED’s unemployment predictions do not reconcile with causal or coincidental historical data,” Fisher adds.