The Housing Drag Casts A Long Shadow

During 2006, productivity growth was the weakest in nine years, while the labor cost required to produce a given unit of a good or service surged. But don't fret too much: The data on productivity and unit labor costs are being skewed by the housing downturn.

Investment in residential construction plunged in the fourth quarter, posting an annualized decline of 19.2%, the biggest quarterly contraction since 1991. What's more, the housing recession knocked a quarter-percentage point off economic growth in 2006, even though residential investment accounts for less than 5% of the economy. Meanwhile, residential construction and specialty contractor payrolls declined by just 1.4%, or 47,300 workers, in 2006.

Productivity Growth Leveled By Housing
The resulting drop in output per worker in residential construction weighed heavily on the productivity data. The Bureau of Labor Statistics reported nonfarm labor productivity rose 2.1% in 2006; homebuilding pulled that growth rate down by about two-thirds of a percentage point, says Steven Wieting, an economist at Citigroup (C ). And since homebuilders handed out few pink slips as construction activity fell, unit labor costs climbed. Rather than signaling surging wage pressures, though, higher unit costs reflect the same amount of labor building fewer houses.

All this is about to change. Residential construction payrolls don't begin to decline until after the number of housing completions start dropping, which began in the second half of 2006. "The layoffs are going to come," says Wieting, who estimates that job cuts in housing could top 500,000 during 2007. What's more, the declines in residential homebuilding are expected to dissipate. The combination means "productivity measures could rebound measurably over the course of 2007," says Wieting.

A return to stronger productivity and slower unit labor costs would help to reassure economists that the long-running productivity boom is still intact and ease any worries about future inflation.

By James Mehring in New York

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