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DIY and the effects on GDP

22 August 2012

I was staying at a family friends’ house in Maryland. Recently, they have decided to restore the deck at the back of the house. However, instead of hiring contractors to build it, they have decided to do it themselves.

While at first this may seem unlogical as building a deck requires fine carpenting and planning skills, a single economic factor has convinced them to DIY–saving money.

Hiring contractors to build a deck of their desired size would cost upwards of $10,000. Buying the materials at a Home Depot and renting the required machinery would only cost a fraction of this. Yes, the concept of opportunity cost comes in but in their case, with carpentry already being a hobby of theirs, this project is simply considered a larger undertaking than their other works.

The thing is about DIY projects and other non-marketed items is that they are not reported in the GDP number. This means that the GDP is consistently under-reported.

With a recession looming, there is a higher tendency to do-it-yourself instead of hiring workers. This leads to a negative feedback loop.

Recession –> more DIY projects –> under-reported GDP –> recession

In times of recession, parents may avoid day care centers and decide to keep the child at home. Homeowners may decide to paint their rooms by themselves instead of a hiring a professional.

All of these activities circumvent the contractors market, which report their revenue to the government, and so lead to an understatement of the rate of economic growth of national output.

However in the light of all of this, there is an entire industry set up to accommodate DIY. Home Depot, Lowes, SCG Home Mart (in Thailand) are all reliant on customers that do it themselves. Most of these stores provide materials and even machinery needed for a wide range of DIY projects.

So while the labor aspect of DIY is not included in the GDP, the materials and machinery used are still partially reported.

In this aspect, a recovery from a recession is a difficult feat as there are continuous negative feedback loops in the economy.

Take for example:

Recession –> negative speculation –> fall in business confidence –> drop in investments and increase in savings –> fall in national output.

Again this makes a recovery challenging.

It is simply the business cycle that revolves between boom and recession periods. And it is this nature that makes a recovery an arduous effort.

However, I personally think that this is where the government is a crucial aspect. It needs to use its power to revert the recession by creating jobs and injecting capital into the economy when businesses are not willing to do so.

Only with the support of an entity that is not strictly tied to the markets can an economy grow out of a depression period.

Olivier Heinen

Portfolio Officer

olivierheinen@broadgatefinancial.com