Housing construction declines further into recessionary territory

 

 - by New Deal democrat

As promised, economic data resumed this morning, and with it my extended posts.

First, the usual point that housing is a very important and leading sector of the economy, typically turning down more than a year before a recession begins. And with higher mortgage rates as well as surging prices, housing has indeed turned down.

This morning the Census Bureau reported that housing permits, the most leading of these metrics, rose 1,000 annualized, while starts, which are noisier and typically lag permits by a month or two, declined -149,000 back into their general 2024 range (although their three month average, which smooths out some of the noise, rose to a 12 month high):

The trend is slightly higher compared with this past summer, but within a limited range over the past two years.

But as I always point out as well, the *real* economic measure of housing is total construction. That had levitated for almost two years after permits peaked before turning down last year. And they declined more this month, down -20,000, or -17.8% percent from their peak (gold, right scale):

Housing construction is now down well into the range where in the past a recession was more likely than not to occur in the near future.

But as I wrote about last week, before a recession begins the even more lagging measure of housing construction employment almost always turns down as well. And as I wrote last week, that measure is *still* levitating, with job growth continuing right up through the latest employment report:

Finally, turning to the metric that leads even permits, here is a look at mortgage rates averaged monthly (blue, left scale) compared with single family permits (red, right scale), which are the least noisy most leading measure of all, and which were unchanged at their 10 month high):

With mortgage rates back hovering around 7%, I expect more of the same from housing permits and starts: very little room to improve in the next few months, and more likely to stagnate or turn back down slightly.

If housing construction is a drag on the economy, and manufacturing is no more than treading water, that makes services all the more important. And I read yesterday that one way to really put a damper on employment and spending is to lay off 100,000’s of federal workers, putting fear into the decisions of not only the workers not laid off, but all of the people likely to be caught up in the ripple effects thereof.

Data drought continues

 

 - by New Deal democrat

There is no new significant economic data today, and I am on the road. Meaningful reporting should resume tomorrow with housing permits, starts, and construction.

In the meantime, here is a look at a high frequency series I keep track of: Redbook retail sales, for the past year:

There are some peaks and valleys, generally around Holidays like Thanksgiving, Christmas, and the like, but the average over four weeks has stayed fairly steady at +5% YoY, which is about normal during expansions.

Since consumer inflation, especially ex-housing prices, has remained in the 2%-3% range, this means there has been a fairly steady increase in consumer spending that has continued over the past year.

In other words, “steady as she goes.” And since the consumer economy is about 70% of the whole economy, that has pretty much been the story for the entire economy.

Weekly Indicators for February 10 -14 at Seeking Alpha

 

 - by New Deal democrat

There’s no significant economic news today. Since I didn’t publish a link to my “Weekly Indicators” post up at Seeking Alpha over the weekend, here it is now.

Left to its own devices, as I’ve written a number of times recently, the economy is in “steady as she goes” mode, with few significant moves in any of the indicators, with the short term forecast and the nowcast both continuing to look good.

Of course, it’s the “left to its own devices” which is, shall we say, chancy at the moment. But in the meantime, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with some lunch money as well.

January retail sales: once or so a year, it lays an egg. This was one

 

 - by New Deal democrat

It’s that time of month again for my favorite indicator for the consumption side of the economy: retail sales have been tracked for over 75 years. When they are lower YoY, that has historically been a good (not perfect) indicator that a recession is near. That’s because that same 75 year history empirically demonstrates that consumption leads jobs. In other words, it is the change in sales that causes employers to add or lay off employees (not the other way around, as I have sometimes seen claimed).

They are somewhat noisy, especially around the Holiday season, and they do get significantly revised, both of which were apparent in January’s report. In nominal terms, retail sales declined a sharp -0.9%, but December was revised higher by +0.3%. Since CPI tagged a strong 0.5% in January, that means real retail sales declined -1.3% for the month. Because I had the genius thought several months ago that because shelter prices (i.e., house prices and rent) were distorting CPI, maybe they were distorting the signal from real retail sales as well. So they are included below in light blue as well. Note the graph is normed to 100 as of just before the 2021 pandemic stimulus:

When we take out shelter, real retail sales show a solid uptrend since July 2022 (when gas prices were $5/gallon). Note that the December/January numbers have shown the sharpest m/m changes for each of the last three years. I am thus inclined to treat this month’s big decline as unresolved seasonal noise unless there is confirmation next month.

The best recession vs. expansion signal is the YoY% change in sales, which - pretty much until the pandemic - almost always forecast an imminent recession when it turned negative. Again, when we take out the distortions caused by shelter, the false recession signal almost completely goes away:

Even with January’s downturn, the forecast is for continued expansion.

Finally, because consumption leads employment, per the above paradigm, here is the update on that:

With the downward benchmark revisions in employment numbers for the past year, the two series are coming much closer to being in sync. While the forecast remains for positive employment reports, the suggestion from real retail sales is that there is likely to be continued deceleration in the YoY comparisons. In early 2024, the average monthly gain in employment averaged 180,000, so per this model I am expecting the next few months of job gains to average less than that.

Jobless claims: more of “steady as she goes”

 

 - by New Deal democrat

Now that we are well past the Holidays, seasonality has settled down and so have the comparisons for jobless claims.

Initial claims declined -7,000 to 213,000 last week, and the four week average declined -1,000 to 216,000. With the usual one week delay, continued claims declined -36,000 to 1.850 million:

On the more important YoY basis for forecasting purposes, initial claims were higher by a mere 0.9%, and for the first time in five months the four week average was *lower,* by -0.7%. Continuing claims were higher by 2.6%, about their average for the past year:

It’s too early in the month to talk about what this might mean for next month’s jobs report, but initial claims, along with the YoY% change in the S&P 500, constitute my “quick and dirty” forecasting model. Basically, if claims are higher YoY, and the stock market is lower, the economy is almost always in trouble. Here’s the update:

With jobless claims essentially unchanged from one year ago, and the stock market higher by about 20%, the verdict is: more of “steady as she goes.”