Employment, the Housing Bubble, and the Hidden Work Force

I’ll apologize in advance for the length of this article. But it will enlighten you if you have the patience to finish.

Despite the bursting housing bubble and a fall in housing starts of over 30%, unemployment remains very low. How can that be? Home builders downsize crews, shrink their land acquisition and development departments, and put the brakes on construction.

Yet the employment statistics remain strong. Don’t get me wrong. I’m happy, but puzzled. So I’ve been poking around trying to understand this phenomenon since the real estate downturn got its full head of steam last year.

Recently I was talking with Jim Bayless of Treasure Homes, who shed first light on this for me. He explained to me that much of the construction labor employed by sub-contractors consists of undocumented workers. Since these folks are never officially on the employment rolls to begin with, they don’t show up in the unemployment numbers when the work dries up. That’s pretty nice for us, an extra big shock absorber on the plane’s landing gear so we get that “soft landing” everybody’s talking about.

But where do those folks go? Well they go on home, or they move on to someplace where there is work.

THE HIDDEN WORK FORCE

Then I ran across an article by Nouriel Roubini entitled: Falling Remittances from the U.S. to Latin America as Evidence of the Housing Slump which references a recent Wall Street Journal story and research by Walter Molano at BCP Securities, who writes:

The rapid slowdown of the U.S. housing sector could have dangerous implications for Latin America and the other emerging market countries that depend on remittances for their balance of payment needs.

Remittances became important a few years ago, when they began to eclipse other forms of capital flows, such as foreign direct investment, multilateral assistance and loans. In 2005, the World Bank estimated that the total level of money sent home by immigrants from emerging market countries was $223 billion. In 2006, Latin America received $62 billion in remittances, of which 75% was from the U.S.

Holy cow! Not only was I unaware that economists had a term for this, but I had no idea how big a deal this is. Roubini points out that this is one more piece of strong evidence that official US employment statistics do not properly capture the loss of housing jobs that has accompanied the most severe housing recession in decades. Okay, makes sense, and I’m starting to connect the dots. How serious is this issue?

EXTERNALIZING THE COST OF OUR HOUSING DOWNTURN

As stated by the WSJ a couple of weeks ago, the phenomenon is serious both for the US and for many Latin American countries. In case you can’t read the whole article without a subscription, I’ve copied it here:

Latin America Feels Pain of U.S. Housing Slump

By Joel Millman
April 23, 2007; Page A2

OAXACA, Mexico — The slowing U.S. housing market already has taken a bite out of the U.S. economy. Now, the fallout is spreading to Latin America.

That’s because home construction is the principal gateway industry for immigrants entering the U.S. labor market. Those immigrants contribute the lion’s share of the estimated $50 billion in cash sent annually from the U.S. to family members and others in countries south of the border. That tide of cash appears to be ebbing.

Monthly remittances from the U.S. to Mexico have dropped every month since their peak of $2.6 billion in May 2006 — shortly before new-home construction in the U.S. plunged. In February 2007, the latest month for which data are available, remittances to Mexico had slowed to $1.7 billion.

Mexico, Latin America’s remittance leader, may be a leading indicator of a trend unfolding across the continent. In a recent study of 15 Latin American economies tracked by BCP Securities of Greenwich, Conn., all but three showed better than a 90% correlation between the ebb and flow of U.S. housing starts and the swelling and shrinkage of remittances as recorded by the nations’ central banks.

“The contraction in remittances will dampen domestic consumption and hamper [economic] growth rates” in countries ranging from Mexico to Colombia to those in Central America, said the study’s author, BCP Securities economist Walter Molano.

The slowdown could be double trouble for Mexico, where the economy has already started to slow because of weaker growth across a wide array of American industries that depend on Mexico for parts or final assembly. U.S. gross domestic product, the widest measure of economic output, grew at an inflation-adjusted annual rate of 2.5% in the fourth quarter of last year and is widely expected to clock in at about 1.9% for the just-ended first quarter of 2007. (The Commerce Department will report its preliminary estimate of first-quarter GDP on Friday.)

The recent falloff in remittances reverses a long-standing trend in which a slowdown in Mexico’s economy led to an uptick in remittance revenue as Mexicans migrated north to replace jobs lost at home, Morgan Stanley’s chief Latin America economist Gray Newman says.

But with U.S. housing market slowing, that safety valve may close. “If continued, Mexico’s consumers could find themselves with less of a shock absorber, which has helped smooth out business cycles in recent years,” Mr. Newman wrote in a report last week.

Record low unemployment during the Clinton years helped draw undocumented Mexican workers, then mainly employed in agriculture, into construction and other service industries. With the housing boom, wage differentials, which used to favor farm work, started to tilt toward the building trades, attracting even more labor from Mexico.

Data showing what appear to be fewer illegal crossings at the U.S.-Mexico border adds to the evidence of a housing-related plunge in remittances. Apprehensions of attempted crossers are down just over 10% during the first quarter of this year from the same period in 2006, according to federal law enforcement. The Bush administration claims the decrease is because of tighter border security. But those on the Mexican side say traffic has slowed for a simpler reason: There are fewer jobs waiting for those who make it across.

The pain of a U.S. housing slump affects people such as Donato Diaz in the tiny village of Santa Gertrudis Zimatlan, in southern Oaxaca state. He returned from the U.S. in 2000 after spending more than a decade building homes in California’s sprawling suburbs. Mr. Diaz used the money he made there to build his own construction-supply store. However, its fortunes depend heavily on cash transfers from Mexicans still working up north to family members here, who use the money to improve their homes.

Mr. Diaz’s business is suffering now. In 2003, he says, he bought a dump truck to haul sand to construction sites. During the past few years, the truck made seven or eight deliveries a day. Now? “We do two loads a day,” Mr. Diaz says with a sigh.

Between 2000 and 2006, almost 20,000 Hispanic laborers entered the U.S. construction work force in just one occupation: cement mason. Another 72,000 became drywall hangers and 140,000 more as painters, according to figures from the U.S. Bureau of Labor Statistics. The vast majority of these new job holders were foreign-born and crossed the border illegally, according to the Pew Hispanic Center in Washington.

As housing starts slow, recent hires on construction sites are the first to lose their jobs — and the first to warn relatives back home not to bother with a risky border crossing until the job picture improves. How many Mexican workers have lost their jobs? Most immigrants send an average of $1,000 a month back home, and Mexico’s remittances are down by about $600 million, representing earnings from about 600,000 workers.

Many of these workers rely on day-to-day employment through small, family-owned sub contractors, whose hirings and firings don’t surface in overall job-loss statistics.

Trouble in the U.S. housing market could also affect other industries staffed by immigrant labor. The carpet industry, for instance, is dominated by various nationalities at different points in the chain: Many Mexican workers are employed in factories that make rugs, Central Americans dominate the carpet-installation business and Brazilians have carved out a niche in rug cleaning.

Little wonder, then, that remittances from the U.S. are dropping off almost everywhere in Latin America. Brazil received $330 million in remittances from the U.S. in February compared with about $446 million per month on average a year ago. Monthly remittances to Guatemala, which peaked last May at $361 million, dropped to $271 million in February.

The slowing housing market also weighs on remittances in other ways. U.S. homeowners are likely to compensate for rising mortgage payments by cutting back on services that employ large numbers of immigrants, such as house cleaning, landscaping and laundry. Homeowners may also cut out frills such as visits to restaurants and beauty salons, big employers of immigrants.

As Gordon Hanson, a labor economist at the University of California at San Diego puts it: “Among nonessential expenditures that higher mortgage payments might eliminate, getting the nails done might be at the top of the list.”

The remaining issue is when the loss of jobs in the housing sector will show up in the official US employment statistics. My view is that such job loss will emerge even among the official data in the next few months. At some point home builder will have to lay off documented and legal workers in addition to the undocumented one. When that happens official US job creation could crawl to 60K jobs per month. Indeed, the service sector is - on average - creating only 120k jobs per month. Manufacturing is shedding about 20k jobs per month. And if - as likely - official data will soon show 40k plus jobs lost in housing the net job creation will fall to about 60k per month, a very sharp slowdown in job creation and income generation.

And the ADP jobs number today was 64,000 jobs. Right on target. We’ll see what the April jobs report on Friday shows. Finally, from Fannie Mae:

“It is true that the unemployment rate hasn’t risen (it actually fell to a cyclical low of 4.4 percent in March), but because it is a lagging indicator of economic activity, continued below-trend economic growth will eventually cause it to rise,” says David W. Berson of Fannie Mae Economics and Mortgage Market Analysis in his weekly commentary on the 16th.

What does all this have to do with mortgages?? Hell, I don’t know, but it’s fascinating stuff.

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