The Extreme Importance of Real Estate
The US economy has changed very significantly over the years (chart below, click to enlarge). Manufacturing has been off-shored and replaced by professional/business services, finance and education and healthcare. Broadly speaking, today the five top categories equally account for 62% of GDP (1970 figures in parentheses) :
Real Estate: 12.7% (10.5%)
Wholesale and Retail Trade: 12.6% (14.5%)
Government: 12.6% (15.2%)
Manufacturing: 12.1% (22.7%)
Professional and Business Services: 11.7% (5.4%)
and another two equally share another 15%:
Education and Healthcare Services: 7.8% (3.9%)
Finance and Insurance: 7.7% (4.1%)
One immediate observation: the closely related real estate and construction sectors account for a combined 17.6% of value-added in the economy, larger by far than any other. The current bubble-popping in this sector will impact the economy far more heavily than some think (see below about jobs).
The finance sector does not appear to be nearly as important, making up only 7.7% of GDP. In simple terms, don't expect strength in finance to bail out the economy from its real estate weakness.
There is another way to look at the economic importance of each sector: by the percentage of jobs related to each one versus their impact on GDP. The next chart compares the percentage of total jobs in each sector vs. each sector's percentage of GDP.
One extreme discrepancy immediately pops out: the real estate sector creates 12.7% of economic activity, but accounts for only 1.6% of all jobs! There is a very, very important message here: real estate's economic "surplus" subsidizes millions of other jobs, particularly in education, healthcare, entertainment and recreation where much less GDP is produced in relation to employment.
If we chart the ratio of GDP/Jobs for each sector this imbalance becomes starkly obvious. Only mining and utilities comes close, but they contribute relatively little to overall GDP. Real estate is unique, in that it is tops in GDP creation AND accounts for so few jobs directly. (Data from the Bureau of Economic Analysis).
The message here is very clear: the extreme 8-to-1 GDP/jobs ratio means that a downturn in real estate can translate to a sudden spike in unemployment in supposedly unrelated sectors of the economy and a rapid plunge into recession. The bursting bubble in housing bears VERY close watching...