- by New Deal democrat
No data today, but since it is mainly a housing week, let me pick up on a topic I discussed at the end of yesterday’s post; namely, if housing does indeed forecast an oncoming recession, what should we expect next in that sector?
To cut to the chase, ultimately we need to look to construction employment.
Briefly for background, I won’t bother reposting the graphs, but the most leading aspect of housing data are mortgage interest rates. After that the most leading data are new home sales (which are very noisy) and permits, with single family permits being the least noisy. Permits, starts, and sales all lead prices.
And, reposting from yesterday, permits substantially lead housing units under construction:
Permits also lead residential construction spending adjusted for headline inflation:
Now let’s compare housing units under construction with inflation adjusted residential construction spending. In the graph below I measure each YoY, and in the case of construction spending, subtract YoY headline inflation so that what is shown is the % by which YoY residential construction spending exceeds or trails overall inflation. Finally, I also include the YoY% change in employment in residential construction:
Inflation adjusted residential construction spending has typically led housing units under construction, and both have led residential construction employment.
For completeness’ sake, let’s compare house prices as measured by the Case Shiller repeat sales index with adjusted residential construction spending:
Construction spending has typically led house prices in the past 20 years.
In fact house prices adjusted for inflation have even lagged residential construction employment, and did not even turn down in the 2001 recession:
Now let’s bring the rest of the goods producing sector (mainly manufacturing but also notably non-residential construction employment) into the mix.
As we already know, manufacturing as measured by the ISM index has been contracting since 2022:
Again, although I won’t repost the graph, because manufacturing is only about 1/4 of the US economy, for recession forecasting purposes I have begun economically weighting it with the ISM services index.
So in the following graphs I compare the YoY changes in employment in residential construction, construction generally, manufacturing, and the entirety of goods production employment.
First, here is the historical record from 1950 through 2002 (note that the subcategory of residential construction employment was only added in 1988):
Next, here is the period from 2003 until just before the pandemic:
Now here is our post-pandemic period:
Here’s the upshot of these three graphs: Focusing on manufacturing or residential construction employment alone is not enough. If one turns negative but not the other (e.g., 1966, 1984, 1994, 2002) a recession typically does *not* happen. It is only when there is a more broad-based downturn across multiple goods-producing sectors that a recession typically occurs.
As you can see from the final graph, that YoY downturn has already manifested in manufacturing. It has not manifested in either residential or non-residential construction, nor in goods production generally.
Indeed, on an absolute basis, but residential and total construction employment are still increasing:
And total goods-producing employment only turned down in the past month (and that may be reflective of hurricane impacts):
To sum up: with permits, starts, and housing units under construction all down from their peaks, at levels at least close to consistent with an oncoming recession, the big item to look for is employment in residential construction, and construction generally. If manufacturing employment remains negative, and construction employment turns down, that would strongly indicate that more likely than not a recession is approaching.
