- by New Deal democrat
The post pandemic period has been an exception to many past relationships. This morning’s data on housing construction raises the issue as to whether housing is going to be included in those exceptions as well. That’s because the data has been classically recessionary for a number of months, and yet the economy has not rolled over.
In general, this morning’s report on housing permits, starts, and construction continues the trend of posting low multi-year numbers, but the downward trend may be abating.
Permits (gold in the graph below) declined -39,000 to 1.354 annualized, while the more noisy starts (blue) increased -70,000 to 1.428 annualized. The former in particular remains very close to its post-pandemic lows. The metric that is the least noisy of all and conveys the most signal, single family starts (red), rose 1,000 to 870,000 annualized:
In the above graph, I normalized permits and single family permits to 100 as of their post-pandemic peaks. I did the same for starts, but used their peak three month average. Starts are down 20.0% from their peak, permits 29.5%, and single family permits 30.0%.
As I showed you last month, the historical pre-pandemic absolute levels of all three of the above metrics indicates that the current levels of decline from peak were typical of those in place at the beginning of most of the recessions of the last 50+ years, although in two cases - 1991 and the Great Recession - they were down 50% or more.
On a YoY% basis, steep declines in permits and starts, generally more than 10% YoY, have persisted right up into recessions:
By contrast, at present, permits are down -5.7% YoY, single family permits -7.9%, and the noisy starts actually higher (vs. a very low July 2024 comp) by 12.9%.
As I have written many times in the past several years, the best “real” measure of the economic impact of housing is units under construction (blue in the graph below). This month they rose 1,000 from last month’s four year low to 1.357 annualized. They remain down 21.9% from their peak (graph compares with single family permits, where both are normalized to 100 as of their respective post-pandemic peaks):
Again, as I’ve written in the past two months, more often than not in the past, by the time units under construction had declined by this much, a recession had already begun. The only two exceptions were the late 1980s, where the pre-recession decline was -28.2%, and 2007, where the pre-recession decline was -25.6%.
One reason why the steep decline in housing has not caused a recession yet is that other durable goods purchases, and in particular motor vehicle purchases, have not followed suit. In the below graph I show the historical pre-pandemic YoY% change in housing units under construction (blue) vs. purchases of autos and light trucks (gold, averaged quarterly):
With the brief exception of the 1981 “double dip” recession, motor vehicle purchases were down YoY for several quarters before the recession began, although in the case of the 2008 Great Recession it was only by about 2%. By contrast, so far this year purchases of cars and light trucks is running slightly *higher* YoY:
As I indicated yesterday, the trend in absolute light vehicle sales this year so far is flat. if that hasn’t changed by the 4th Quarter, we might very well have the negative YoY sales signal from motor vehicles that is lacking at present.
Finally, let’s take a look at housing units under construction (red) vs. the final shoes to drop typically before recessions have started, houses for sale (gold) and residential construction employment (blue), in comparison with units under construction. I won’t bother with the historical view this month, but we did get important revisions in the payrolls report earlier this month:
It appears that the proverbial shoe has dropped with regard to residential construction employment, which as revised has declined every month since March, albeit only by a total of -0.3%. On the other hand, the number of new single family houses for sale made another new high last month.
I would expect all three series to be negative YoY by the time a recession begins. That could happen by the end of this year.