Tuesday, April 3, 2018

Residential construction spending portends slowdown for remainder of2018

 - by New Deal democrat

Yesterday's February report on private residential construction spending is of particular importance to the overall direction of the economy this year.

In terms of their order in leading the economy, the housing data I track runs in this order:
  • new home sales (but these are very volatile and heavily revised, so the signal to noise ratio is low)
  • permits (much less volatile)
  • single family permits (even less volatile - signal to noise ratio is high)
  • housing starts (more volatile than permits, but have the advantage of being "hard" economic activity)
  • residential construction spending (the least volatile of all of the data, even though less leading)
  • residential fixed investment (part of quarterly GDP, so the last reported)
There is also the weekly mortgage applications report, which recently has tracked new home sales better than the other series, but has had compositional issues in the past.

Here are the two least volatile series, single family permits (blue) vs. inflation-adjusted private residential construction spending (red) for the last 15 years:

You can see the relative advantages of each. Single family permits are more leading, but somewhat more noisy, while residential construction spending is not noisy at all, but follows a few months after permits.

Notice the flattening of the blue line for the last year or so. That becomes more apparent when we look at the q/q percent change in construction spending (nominal in the two graphs below):

Since we only have the first two months' data for 2018, let's look at the same data m/m for the last year:

Even nominally, so far the first quarter of 2018 is showing growth at a rate of +0.2% q/q.

While we had slowdowns even more than this in 1994, 1996, and 2010 without recessions following, actual downturns in 1999 and 2006-07 did presage the recessions.

A look on a YoY% basis through February shows that single family permits have increased at about a 10% YoY pace, while real residential construction spending is only up about 4% YoY:

Finally, residential construction spending tends to correlate closely with private residential fixed investment in the GDP report:

The good news is that real private residential construction spending is still positive, so that adds to the evidence that no actual downturn in the economy will happen in the next 9 to 12 months, but on the other hand the bad news is that this is "hard" evidence of an impending *slowdown* in growth for the remainder of this year.