- by New Deal democrat
In a landmark paper almost 20 years ago, UCLA Prof. Edward Leamer wrote that “Housing IS the Business Cycle.”
In that paper he concluded:
In the years before recessions … consumers contribute a total of 65% of the leading weakness. In contrast, business spending contributes only 10%…. The temporal ordering of the spending weakness is: residential investment, consumer durables, consumer nondurables consumer services….
I’ve been writing for many months that the housing sector has been recessionary. I’ve also noted that another important leading indicator from the real economy, truck sales, has also been recessionary. This month three more of the items on Leamer’s list, albeit in noisy terms, also appear to have turned recessionary.
The first of those is personal spending on durable goods, which I noted last Friday. Here is the graph I used then, normed to 100 as of one year ago:
The second is motor vehicle sales for December (blue in the graph below), which was reported as part of last Friday’s GDP release, and is the quinessential “consumer durable” on Leamer’s list. These declined sharply to an annualized rate of 14.810 million, the lowest monthly number in four years, and over -17% below the peak month last March, in which a SAAR of 17.892 units were sold:
The three month average of 15.5 million is -9% below the peak average earlier last year of 17.0 million. This is significant because, as the historical graph below indicates, typically recessions have begun once motor vehicle sales have declined roughly -10% from peak. In both the above and below graphs I also show heavy truck sales (red), which almost always decline first and more decisively, and recover later. As I’ve noted above, these have already been recessionary:
The third metric is manufacturers’ new orders for consumer goods, which were reported last Wednesday. These declined -1.4% for the month, but more importantly with the exception of last April and May were the lowest in almost two years:
They were also negative YoY, just as real personal spending on goods also turned negative YoY in that most recent report last Friday:
In other words, every single item on Leamer’s leading checklist has turned negative except for consumer spending on services (which I question because frequently services spending has continued to increase throughout recessions).
On Tuesday I noted that since September three of the four of the typical monthly data upon which the NBER has traditionally relied upon in determining if a recession has occurred - payrolls, real sales, and real income excluding government transfers - have been essentially flat:
I characterized this as “an economy barely holding its head above water.” By the terms of Prof. Leamer’s forecasting method, a yellow flag “Recession Watch” is warranted. Should the three month averages of motor vehicle sales and new orders for consumer durables turn more negative, a “Warning” would be warranted.
