Economic Quarterly

We use a vector autoregression (VAR) for the components of gross domestic product (GDP) to conduct some sectoral and temporal accounting for the current recession. It is obvious that housing played an important role in the current recession, but residential investment declined for two years before GDP declined. According to the VAR, the level of GDP in the second quarter of 2009---the trough of the decline in GDP---was close to but above the level implied by the estimated sequence of VAR innovations to residential investment over the period 2006:Q1--2009:Q2. Until late 2007 other offsetting shocks kept real GDP growing roughly at trend, but after that the other shocks disappeared or reversed sign. Taking a similar approach with employment, we first observe that, as with output, employment in the housing industry began to fall well before aggregate employment. However, unlike output, the eventual decline in aggregate employment dwarfed the decline in housing-industry employment. The shock to residential construction employment can nonetheless explain a small portion of the current employment shortfall relative to trend.