The Real Estate Bust Was New Single Family Home Investment Dominated
Many components of new real estate investment took a hit in the housing bubble collapse that triggered the financial crisis. But, the dominant component of reduced construction investments has come from new single family homes. This is about 20% of the pre-bust peak right now and still well below late 20th century historical norms. New single family home investment plummeted to far below historical levels in the housing bubble collapse and remains where it fell today.
Other components of construction investments (single family home improvement, multifamily, commercial, etc.) have merely experienced a modest bump in the road and aren't far below pre-financial crisis levels today, although they too have experienced a slump.
The Employment Recession
Meanwhile, while the latest monthly job creation figures weren't horrible, in the bigger picture, the U.S. economy is in a pickle.
The number of jobs lost relative to the pre-recession peak is currently about the same point as it was at the deepest post-WWII recession where it stayed for only a couple of months in 1948. The situation has been that bad in the cuurrent employment recession for about two year and two months.
Jobs lost relative to pre-war jobs has been worse than the five months it spent there in 1957, and the situation has been that bad for about two yearsand four months. The employment recession has been worse than every employment recession since 1990 for two years and eight months already. These are the so called "post-modern" employment recessions which have tended to be more shallow, but longer lasting.
Four months from now, this will be the longest post-Great Depression employment recession in history, surpassing the four year long job slump that followed the tech bust in 2001.
It is almost certain that this employment recession will last much longer than four years. It is very unlikely that employment will recover to pre-financial crisis levels anytime in 2012 either given the trendlines of this employment recession.
Nothing that is going on in the domestic policy agenda or in the global economic situation suggests that the United States will be changing these trendlines dramatically any time soon. The U.S. government and almost all states (and most first world foreign countries) are taking Hoover style austerity measures instead of injecting demand into the economy with Keynsian/New Deal type stimulus efforts. The only remotely political plausible step that the U.S. could take which would provide a government spending boost that could pull the economy out of the jobs recession sooner would be to start some major new war (a solution that I heartily disfavor).
Given the growth in the labor force over three or four years that occurs naturally, the United States will be hard pressed to return to pre-financial crisis employement per population levels until late in 2013 at the earliest, and it could take until 2014 or later, or might never reach pre-financial crisis levels and produce a structural reduction in the amount of people employed in the U.S. relative to its population.
Current trendlines for this employment recession suggest a recover to pre-financial crisis levels sometime around the fall of 2013, about six year after it started.
2012 Election Implications
Naturally, if you are President Obama's campaign manager, this is not good news. Empirical studies of the impact of the economy on voter behavior in the election suggest that the relevant time frame starts around January of the year of the election, i.e. January 2012 in this election, about five months from now. Nobody thinks that the economy will have recovered to pre-financial crisis levels by then in employment, which is the most politically sensitive economic indicator. A double dip recession isn't out of the realm of possibility.
Republicans in the House of Representatives and the newly inked debt limit deal, however, severely restrain his ability to use government spending and employment to change the current trend, or enact major new economic legislation of any kind. They are playing to deny him any victories to campaign upon and their desire to deny him victories so will surely only heighten as the election grows closer.
Obama can try to blame Republicans for inaction, but only if he first makes a dramatic change of course and starts vigorously advocating for a course of action that Republicans refuse to take. Obama can hope that the Republicans nominate someone unelectable whose campaign will self-destruct and alienate the American people, but he has essentialy no say in that process. Republican brinksmanship in the debt limit deal wasn't well played in the court of public opinion. But, counting on Republicans to screw up isn't exactly a pro-active strategy that inspire much confidence.
The optimist narrative says that a Republican resurgence peaked too soon for Republicans to experience any further gains in 2012. The Tea Party gains in the off year 2010 election were a high water mark at which President Obama had already hit bottom and the Republican Party's enthusiasm levels had surged as much as they could. But, in 2012, voters can see from two years of Tea Party efforts to govern in Congress and in state governments where they made inroads, that their style of governing has little to recommend it. Divided government has also denied President Obama any major acts that could rally Republicans and independents against him as health care reform did in the 2010 election. Obama's major legislative steps are now old news, the credibility of efforts to frame him as a threat to gun rights that thrived in 2010 hasn't materialized.
U.S. troops will essentially be out of the Iraq War that President Obama campaigned against and reduced U.S. involvement in dramatically. And, President Obama is already starting to heed bipartisan discontent over the U.S. commitment in Afghanistan and may be able to back down from it without paying a political price for doing so now that Obama bin Laden has been killed on President Obama's watch. The bipartisan debt deal, which included defense budget cuts that President Obama's own new Secretary of Defense Panetta has already started to publicly complain about loudly, also makes it hard for Republicans to campaign on the need for more defense spending.
Republicans are trying to make the limited U.S. military involvement in Libya look bad. But, to do so risks looking like they back Gaddafi over the revolutionaries and the Arab Spring movement generally, but they are likely to be in a stronger position by the time the election comes around than they are now, and are likely to seem less like an Islamist radical political movement than some pundits were worried that the Arab Spring movement might have been at first. In any case, President Obama has already stepped back from an already brief level of central U.S. involvement in that conflict which France and Britain have taken the lead in managing, and may be in a good position to reduce U.S. involvement further before Republicans can form a united and vocal front in opposition to it that becomes part of the national conversation. This operation is unlikely to produce many U.S. casualties, and it gives Obama some way to tell the American people that the vast sums we spend on the defense budget is producing some results somewhere, an argument that pro-defense budget Republican factions will be wary of undermining. Republicans are not natural anti-war activists.
Presidential re-election campaigns are fundamentally referrendums on the incumbent. A Republican Presidential nominee will bear the burden of proof with the American people to show that President Obama needs to be replaced and will have to do so without the enthusiasm gap of 2010. This will be a tall order for anyone that the Republican base, newly infused with Tea Party extremists can feel comfortable supporting.
The Republican primary, while providing free press to the Republican nominee that will help familiarize general election voters with Republican policy frames, is also almost invariably going to remind voters just how extreme some of those candidates are and generate a fear factor that could seep to independents and even moderate Republicans if the ultimate nominee is too extreme. No consensus has started to gel in the GOP nomination race, which still lacks a clear front runner. Since some Republicans in Congress will surely hitch their wagons to more right leaning nominees whose campaigns will crash, burn and discredit those candidacies, the Presidental race prove to be a drag on some Congressional campaigns. Strict GOP adherence to a hard right party line over the last two years will also give Republicans fodder in their campaigns in newly redrawn and unfamiliar Congressional districts.
All in all, 2012 looks like it will be a base v. base grim war of attrition that will be fought without enthusiasm or strong central themes by both parties.