Wednesday, January 23, 2013

Why housing permits keep me optimistic about 2013

- by New Deal democrat

In the past I've said that if there were only one piece of economic data I could have, it would be housing permits. They are a very reliable long leading indicator for the economy, not just in the post WW2 period, but in the Roaring Twneties and Great Depression as well.

In fact Professor Edward Leamer of UCLA has gone so far as to say that Housing IS the business cycle. He has shown that the business cycle almost always proceeds in a reliable order: first housiing peaks/troughs, then conusmer durable goods peak/trough, then consumer nondurables (think general retail) peak/trough, and finally commercial durable goods investment peaks/troughs.

That cycle certainly held true going into the "great recession." First the housing bust started, then car sales declined, then real retail sales peaked, and finally commercial goods peaked. Coming out of the recession, the model didn't fit quite so well. Housing, cars, and real retail sales all bottomed or at least stabilized in the first few months of 2009. Most likely part of this was the massive government intervention in the form of the $800 billion stimulus enacted at the end of February 2009. Instead it was manufacturing and exports that were the leading sector.

In the last 12 months manufacturing has stalled or even gone into a slight contraction. But housing, cars, and real retail sales continue to make new highs (as do the short leading indicators of the stock market and inverted initial jobless claims).

Here is the latest update, starting 50 years ago, of housing permits, measured YoY (blue line), compared with YoY job growth (red line)

Here is the same graph, but starting in 1983 instead, to make the pattern somewhat more clear:

While the relationship isn't perfect, note first of all that every single recession has been preceded by a YoY decline in the number of housing permits. Secontly, note that the percent of YoY payroll growth (or losses) follow permits, generally with a 12 to 30 month lag.

About 200,000 more housing permits were issued on an annualized basis in December 2012 vs. December 2011. I fully expect the leading relationship vs. jobs to continue, so even if I am concerned about the impact of the payroll tax hike, I expect the trend of job growth to continue YoY throughout 2013.