– by New Deal democrat
A puzzling relationship this year has been that the housing data has been classically recessionary for a number of months, and yet the economy has not rolled over. And this morning’s dismal report on housing construction was even more recessionary.
Let’s start with the most dismal number of all: permits (gold in the graph below) declined -50,000 to 1.312 million annualized. Excluding the immediate COVID lockdown months of April through June 2020, this was the lowest number since June 2019. The more noisy starts (blue) also declined by -122,000 to 1.307 million annualized. And the metric that is the least noisy of all and conveys the most signal, single family permits (red), declined -19,000 to a 3+ year low of 856,000 annualized:
From the post-pandemic peaks, starts are down 28.2% from their peak, permits 31.7%, and single family permits 31.1%. Although I won’t bother with the graph this month, all of those have been typical readings for the onset of most of the recessions of the past 50+ years, although in two cases – 1991 and the Great Recession – they were down by over 50%.
On the other hand, on a YOY% basis, starts are down 6.0%, permits are down -11.1% and single family permits are down 11.5%. Typically all three have been down 20% or more at the onset of recessions in the past, although in the 1991 and 2001 recessions, they were only down about -10%:
Note that there have been a number of times, for example 1966, 1987, and 1995, where construction has been down -10% or more YoY without a recession occurring.
Let’s turn next to the number of housing units under construction. As I have written many times in the past several years, it is the best “real” measure of the economic impact of housing (blue in the graphs below). In August they declined -20,000 to a new four year low of 1.317 million annualized. They are also down 23.2% from their peak:
The above graph shows how they have followed single family permits (red), as expected. More often than not in the past by the time a decline in units under construction had declined by this much, a recession had already begun. The only two exceptions were the late 1980s, where the pre-recession decline was -28.2%, and 2007, where the pre-recession decline was -25.6%.
Now let’s update housing units under construction with the typical final shoes to drop before recessions, houses for sale (gold) and residential construction employment (red), in comparison with units under construction, all normed to 100 as of their respective post-pandemic peaks. As I noted in the past month, after revisions both the number of employees in residential construction and new one family homes for sale peaked in March and have declined almost uniformly since:
Now here is the same data presented in YoY% change format:
Note that with the exception of 1974 and the COVID recession, houses for sale and (once available) employment in residential construction had turned down YoY before the recessions had begun. By contrast, at present these metrics are higher by 8.1% and 1.5% respectively. But at their present rates of decline, both could be negative YoY by January.
Finally, as I discussed last month, one reason why the steep decline in housing has not caused a recession yet is that other durable goods purchases, and in particular motor vehicle purchases, have not followed suit. Since then we did get an update on both passenger vehicle (gold in the graphs below) and heavy truck sales (red). Here’s the historical pre-pandemic record, averaged quarterly to cut down on noise:
Note that both types of vehicle sales were lower YoY, with truck sales typically down over 10% YoY.
Here is the monthly post-pandemic view:
While truck sales are down -15.8% YoY, passenger vehicle sales are higher by 6.2%. But as the graph below shows, in their present range passenger vehicle sales (gold) could easily turn negative YoY as early as next month:
Meanwhile, even with yesterday’s increase, nominal retail sales of motor vehicles remain in their range since last November.
To sum up, today’s housing construction report for August was very much recessionary, although in some YoY comparisons, I would expect further damage before the actual onset of one. But that could easily occur within the next four to six months. The next big datapoint to watch for will be the update on persona spending on durable and consumer goods.
