- by New Deal democrat
The most lading components of the long leading housing sector rose in this morning’s report for December, while the most important “hard” economic datapoint continued its decline into recession territory.
First let’s compare the most leading datapoint, permits, and the less noisy single family permits, with starts. To reiterate, starts are much noisier and generally lag permits by one or two months. And that is what we saw this morning.
Total permits (gold) declined -10,000 on an annualized basis to 1.483 million. Single family permits (red) increased 16,000 to 992,000. Starts (blue) rebounded sharply, by 205,000 to 1.499 million annualized:
This is consistent with historical patterns, as permits bottomed late last spring and have generally slowly risen since. This has now been confirmed by starts particularly as averaged over three months. Also a reminder that some of the past few months’ volatility in starts was the effect of hurricanes in the Southeast, which delayed activity that has now been made up.
The above ought to result in a near term increase in actual construction. But the previous declines earlier in 2024 are still feeding through into this metric, which declined another -6,000 to 1.431 million units, down -16.4% down from its peak, and the lowest number since August 2021:
In the past units under construction have declined on average -15.1% and by a median of 13.4% before the onset of recessions. Indeed, with the exception of one month in the 1980s, when construction has been down more than -10% YoY, that has always meant recession. Currently units under construction are down -14.8% YoY:
Four months ago I hoisted a yellow flag “recession watch” for housing construction, and last month I hoisted the red flag indicating that housing is forecasting recession. Nevertheless, for the past few months I have cautioned that because permits (and now starts) had bottomed, units under construction would probably not fall much further, which this month’s minor -6,000 decline is consistent with. When recessions have occurred, units under construction continue to decline into the first few months of the economic downturn.
Additionally, employment in residential construction, which typically follows units under construction with a lag, has - surprisingly - continued to increase:
In the past, residential construction employment has been the last shoe to drop before a recession begins. Note that in the laste 1980s this did not occur until nearly two years after construction peaked!:
The very big fly in this ointment is the item that leads permits as well: mortgage rates (red in the graph below). These have recently increased back over 7%. The below graph shows them inverted to better illustrate how they lead permits (/1.5 for scale with single family permits):
The increase in mortgage rates over the past 3.5 months has already led to fresh declined in mortgage applications, and is sufficient to forecast a reversal of the recent increase in permits and starts. If - and most likely when - this occurs recession risks increase.
While the housing sector is forecasting recession in the near future, the jury is very much out on other important forecasting components such as corporate profits in the long leading range, and consumption and employment indicators in the short leading range. As I pointed out above, construction employment is still increasing. And the broader goods employment measure has declined only slightly. Real sales and consumption have also continued to increase. All of these would need to turn down to signal a recession in the short term future.
