- by New Deal democrat
The very important construction data from the long leading housing sector was mixed this morning for November.
The most leading datapoint, permits, increased 86,000 on an annualized basis to 1.505 million. Even more importantly, single family permits, which have the least noise and most signal of any of the datapoints, continued their rebound from their recent June low, increasing 1,000 to 972,000, their highest level since April. Measnwhile starts, which are noisier and tend to lag permits by one or two months, declined another -23,000 to 1.289 million, their second lowest reading since 2020:
Starts did rebound in the hurricane-stricken South, but that was counterbalanced by a steep decline in the Midwest. Again, this series has a lot of noise, so I am not terribly concerned about a one month pothole.
But if housing permits suggested a near term increase in construction, units presently under construction continued to plummet, down -27,000 to 1.434 million, -16.2% down from their peak, and the lowest number since August 2021:
This is very important, because in the past it has declined on average -15.1% and by a median of 13.4% before the onset of recessions:
Three months ago I hoisted a yellow flag “recession watch” for housing construction. I held off hoisting a red flag last month because of the hurricane effects in the South. With that dissipated, I am hoisting the red flag now: housing is forecasting recession.
Nevertheless, as I cautioned last month, in our present situation it appears permits have bottomed. Because starts, following permits, should start trending back upward in the next several months, and housing units under construction follow starts:
I still think housing units under construction will not decline too much further before bottoming as well.
Additionally, employment in residential construction, which typically follows units under construction with a lag, has continued to increase so far:
Residential construction employment should decline before any recession were to occur.
Finally, recall that mortgage rates (change YoY, inverted) lead all of this data, including both measures of permits:
So the issue becomes whether mortgage rates continue to head back higher - in which case recession risks increase - or are at the top of their range going forward.
While the housing sector is now forecasting recession, focusing on it alone is not enogh. Focusing on manufacturing or residential construction employment alone is not enough. As I wrote last month, it is only when there is a more broad-based downturn across multiple goods-producing sectors that a recession typically occurs. Employment in goods producing jobs did decline slightly from two months ago, but it is not significant at this point. As I pointed out on Monday, corporate profits also stalled in Q3, but have not turned down; and if they did peak it would not forecast recession until later next year. Additionally, as we saw yesterday consumption is still going strong.
So while the housing sector is forecasting recession in the near future, it has not been joined by other critical components yet.
