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Home is Where the Leading Economic Indicator Is

There is no better economic indicator of how the markets and the economy are doing than housing starts. So far this year, housing starts have declined 3.1 percent. When housing starts are up, building permits are too. Consequently, housing and mortgage rates can have a significant impact on the bond market. Thus far, mortgage rates have been low and accommodating.

So when the yield on the 10-year Treasury bond briefly drops below that of the two-year bond, not the 3-month and 30-year spread, you have an inverted yield curve, which indicates that recession might be coming. However, most economists do not know when it will occur. Typical ranges are between 10.5 months to 36 months.

When consumers and homebuyers feel confident – and they do – they prop up the economy and the markets by making large purchases on durable goods, like refrigerators, washers and dryers and furniture, which also help corporate profits and increase the value of home-related stocks.

The true indicator, though, is sustained declines in housing starts that slow down the economy thus pushing it into recession. For those who haven’t paid much attention to housing starts, building permits and housing completion stats, here are some recent numbers and important numbers.

The numbers tell the story

Released August 16, 2019, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced July’s new construction stats:

Building Permits: To legally proceed with construction – 1,336,000. The largest gain in two years, at 8.4 percent is above the revised June rate of 1,232,000. Single-family authorizations: 823,000 –1.8 percent above the revised June figures.

Housing Starts: The actual beginning of construction – 1,191,000. This is just      4 percent below the revised June estimate of 1,241,000, due to a shortage of skilled labor and affordable land. Single-family housing starts were at a rate of 876,000 – 1.3 percent above the revised June estimate of 865,000.

Housing Completions: Construction completions – 1,250,000. At 7.2 percent

above revised June estimates of 1,166,000. Single-family completions were 918,000 – 4.3 percent above the revised June rate of 880,000.

Issued on the third week of every month for the previous month, the government numbers are based on construction already begun in a given period. These reflect builder confidence in committing to new construction of privately owned new houses (or housing units) townhouses or small condos, and apartment buildings with five or more units. Each apartment unit is considered a single start, so the construction of a 30-unit apartment building is counted as 30 housing starts.

The facts: push and pull 

Despite a slight 1.3 percent uptick in the construction of single-family homes last month, the gain was offset by a staggering 17.2 percent plunge in the apartment category. Applications for building permits rose 8.4 percent. Apartment complexes accounted for most of the increase. Housing makes up roughly 20 percent of GDP.

In a healthy market, when building activity ramps up, so does GDP. However, looking somewhat weak despite low interest rates, the housing market has been struggling with tighter inventory resulting in sluggish growth. Breaking ground on new projects has gotten more expensive and builders are struggling with labor and land shortages.

Words matter 

“Fairly healthy growth” is forecasted, buoyed up by a strong labor market, low inflation, huge corporate profits and consumer spending – the biggest chunks of the economy – despite pundits predicting a recession as ineffectively as they predict the next rainstorm. The key risks stem from prolonged trade and tariff disturbances and high corporate debt.

While the markets basically went nowhere in more than 15 months, economists do see GDP expanding 2.4 percent in 2019 and 1.7percent in 2020. It expanded 1.8 percent in the second quarter. The economy is expected to maintain its longest expansion in history this year, albeit at a slower pace, as intensifying headwinds from weaker global growth and trade tensions weigh on momentum.

As the second largest manufacturer in the world, and a proven leader in higher-value industries such as automobiles, aerospace, machinery, telecommunications and chemicals, we, are experiencing a manufacturing recession. Falling at a 2.2% rate in the second quarter after a 1.9% drop in the first three months of the year, it is a consequence of China’s cyclical slowdown and the trade war.

However, the U.S. can take a recession hit. We don’t want manufacturing to plunge, consumers to stop spending or global investors to buy up U.S. Treasury bonds causing the yield curve to invert again – a painful and historical warning sign of looming recession – because then the hit will really hurt.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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