Monday, March 4, 2019

Residential construction declines in December, but looks to be bottoming

 - by New Deal democrat

Residential construction spending lags sales, permits, and starts. But it still leads the economy overall, and it is a much smoother data series, with little noise. It is almost all signal, and so it is an important confirmation of the more leading data.

In December, residential construction spending did decline vs. November and also vs. one year ago, but it was higher than September’s and October’s numbers. 

Let’s go to the graphs. Here’s the absolute level of residential construction spending (blue) vs. single family permits (red), first a long term look, and then focusing on the last several years.  As usual, I choose single family permits because they are the least noisy of all the more leading data:

That permits lead construction is easy to see. In the second graph, the declining trend in 2018 with construction following permits with a brief lag is also apparent.

Here is the same data as YoY% changes since the bottom in 2009:

Both series are down YoY.

That neither series has made new lows in several months is encouraging. Although I think there is a little further to go in the next few months, Unless the Fed surprises nearly everybody and raises rates again, I strongly suspect that the bottoming process in new home building is ongoing.