Reconstructing the Great Recession

This article uses dynamic equilibrium input-output models to evaluate the contribution of the construction sector to the Great Recession and the expansion preceeding it. Through production interlinkages and demand complementarities, shifts in housing demand can propagate to other economic sectors and generate a large and sustained aggregate cycle. According to our model, the housing boom (2002-07) fueled more than 60 percent and 25 percent of employment and GDP growth, respectively. The decline in the construction sector (2007-10) generates a drop in total employment and output about half of that observed in the data. In sharp contrast, ignoring interlinkages or demand complementarities eliminates the contribution of the construction sector.