- by New Deal democrat
Much of the data that is being released, like yesterday’s jobless claims data, has to be viewed with an asterisk after it, because of hurricane disruptions. As an addendum to yesterday’s industrial production report, I failed to mention that the BEA that “the effects of two hurricanes subtracted an estimated 0.3 percent” from the total. Even with that increase, production would have been unchanged and manufacturing construction down -0.1%, and both would remains slightly down YoY, so the ultimate conclusion remains the same.
Similarly, Hurricane Beryl in July interfered with construction in July, and then permits and starts bounced back in August. Helene may have affected this month’s report, and Milton almost certainly will affect next month’s as well. Treat that as applying an asterisk to the analysis below.
The most leading metric, housing permits (gold), declined -42,000 to 1.428 million. Single family permits (red), which are just as leading and have very little noise, rose 3,000 to 970,000, the highest since April. Housing starts (blue), which tend to lag permits by a month or two, and are much more noisy, declined -7,000 to 1.354 million. All of the above were affected by very slight revisions to August:
All of this is a rebound from lows earlier this year, and it is what I have been expecting. As I wrote two months ago, “we can expect permits to rise in the next several months, followed by starts,” for the simple reason that for 60+ years, mortgage rates have always led housing permits. And indeed that seems to have happened, given the downturn in mortgage rates (black in the graph below) this year (despite the increase in the past few weeks). :
That’s the good news. The bad news is that units under construction, the measure of real economic activity in this sector, declined another -28,000, and is now down -13.3% from its peak. This is very important, becuase while it is not so leading as permits and starts, it has always turned down, typically by more than -10% before a recession begins (the average is -15.1% and the median is -13.4%). Here is the long-term graph comparing total permits (red, right scale) with housing units under construction (blue, left scale):
Here is the post-pandemic view:
Last month I hoisted a yellow flag “recession watch” for the construction sector, based on this metric being down more than -10%. It is now at the level consistent on average in the past with the onset of a recession.
While there had been a long time after single family construction turned down while multi-unit construction continued to increase and then plateaued, but this year both have declined. As shown below, multi-unit construction has continued to plummet, but the silver lining is that single family units under construction have remained stable for the past three months:
Further, as shown in the long historical view of housing units under construction and permits above, with one exception (the tech producer-centered recession of 2001), in the case of recessions, permits continued to decline sharply even after housing units under construction crossed the -10% threshold and well after recessions had begun.
In our present situation, if I am correct that permits have bottomed and are starting to increase again, then housing units under construction will not decline too much further before bottoming as well.
I concluded this review last month by saying “my base case is that this period of weakness is likely to turn around without a recession occurring. That’s why at this point there is only a housing sector ‘recession watch,’ meaning a heightened possibility, and not a ‘warning,’ meaning one is more likely than not. That continues to be my view - a period of softness without a recession - so long as mortgage rates continue to be lower than they were last year. With a hurricane asterisk.
