---
title: "Housing is the Business Cycle"
authors: "Edward E. Leamer"
source: "NBER"
source_url: "https://www.nber.org/papers/w13428"
paper_id: "NBER WP 13428"
harvested: 2026-08-22
year: 2007
keywords: [housing, residential investment, business cycle, recession]
pdf_url: "https://www.nber.org/papers/w13428"
---
## Abstract

Edward Leamer's well-known NBER working paper (also published in the Federal Reserve Bank of Kansas City's Jackson Hole Economic Policy Symposium proceedings, 2007) argues that residential investment offers by far the best early warning sign of an oncoming recession among the components of GDP. Drawing on evidence from the post-World War II era, Leamer documents that eight recessions were preceded by substantial problems in housing and consumer durables. He is careful to note that housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001 — nor, on his accounting, should it have done so.

The paper's central contention is that, because housing plays a prominent role in recessions, it should likewise play a prominent role in the conduct of monetary policy. Leamer therefore proposes a modified Taylor Rule that depends on a long-term measure of inflation having little to do with the phase of the cycle, and — in place of Taylor's output gap — housing starts and the change in housing starts. He describes these two measures as forming the best forward-looking indicator of the cycle of which he is aware. The rule is designed to create pre-emptive anti-inflation policy in the middle of expansions, when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions, when housing is highly interest-rate sensitive. This, he argues, would make recessions less frequent and/or less severe.

Empirically, the housing sector is characterized as the "swing sector": residential investment typically declines sharply six to eight quarters ahead of a downturn, providing a leading indicator that other spending components do not. The paper is foundational in the housing-and-business-cycle forecasting literature and is frequently cited as motivation for treating residential investment and housing starts as primary inputs to near-term macroeconomic forecasting.