The Week In Review: Are Home Sales Signaling A Upcoming Recession? Yes And No

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by: Steven Hansen
Summary

I could write a post saying a recession was near by extrapolating data trend lines.

However, there are too many signs that the economy is only slowing and not sliding into a recession.

This post looks at home sales and its downward trajectory.

Home sales historically begin contracting around two years prior to a recession - and home sales currently are contracting year-over-year. Is this a warning? This post also reviews the major economic releases issued this past week - although several scheduled releases were not made due to the government shutdown.

The reason many are looking at a recession potential is the worsening trend lines on most data sets. However, data in general has been acting strange since the Great Recession. Using traditional recession flags - a recession should have occurred in 2016. But a recession did not occur which makes one hesitant to take current trends too seriously.

Using new home sales for many of the recessions, year-over-year growth began contracting two years before the recession.

Note that this new home sales data set has not been updated as it's affected by the government shutdown.

Existing home sales have been slowing for the last two years - and in the last six months, the rate of decline has been accelerating.

Overall, my position is that affordability as well as rent vs. buy relationships are the major causes of the deceleration of home sales and not primarily overall economic conditions. It can be argued that there are various non-economic reasons which are impacting much of the other declining data. So interpretation of current conditions seems problematic. However, I will concede that the cumulative affect of all the declining data could interact with unknown consequences.

Where Econintersect stands on the potential of a recession in 2019 is captured by IHS Markit:

Potential trade policy mistakes "remain the biggest threats to global growth," said Nariman Behravesh, chief economist at IHS Markit.

Behravesh, however, isn't forecasting a recession this year.

Recessions happen, he said, when an economy has built up a dangerous excess. For example, the Great Recession was kicked off by an excess in housing markets, the recession before that by the dot-com tech stock bubble and the one before that by an overblown commercial real estate market.

"Those excesses just aren't there right now in the U.S. economy," Behravesh said.

With the government partially shut down where some key data is not being released, it's a challenge to access economic conditions with any degree of confidence.

Economic Releases This Past Week

The Econintersect Economic Index for January 2019 significantly declined, and is now below territory associated with normal expansions. This is a departure from the previous three months where the index's growth rate was little changed.

The following table summarizes the more significant economic releases this past week. For more detailed analysis - please visit our landing page which provides links to our complete analyses.

Other Economic Release Summary For This Week

Release Potential Economic Impact Comment
December Existing Home Sales n/a

The rolling averages have been slowing since the beginning of 2017. This month the rolling averages remained in contraction - and worsened. Despite the NAR's assertion that "After two consecutive months of increases, existing-home sales declined in the month of December" - even using their wackiy methodology to determine rate of growth - the rate of growth year-over-year has been in contraction and declining for the last 4 months.

December Leading Indicators Indicating a slowing economy

The Conference Board Leading Economic Index (LEI) for the U.S marginally declined. Also consider:

Please note that due to the government shutdown, data for manufacturers' new orders for consumer goods and materials for November and December and building permits were not published for December. The Conference Board has forecasted these series in order to publish a preliminary Leading Economic Index. Data for manufacturers' new orders for nondefense capital goods excluding aircraft for November are from the advance report for Manufacturers' Shipments, Inventories & Orders.

December Durable Good n/a

Not issued due to the government shutdown

December New Home Sales n/a

Not issued due to the government shutdown

December Container Counts Indicating a good US economy and bad global economy Simply looking at this month versus last month - this was a good month for imports and terrible again for exports. The three month rolling averages significantly improved for imports and significantly declined for exports. The three month rolling average for exports is barely positive year-over-year.
Surveys Surveys are indicating a slowing manufacturing sector
  • The important Richmond Fed subcategories growth well into contraction. This survey was weak compared to last month as the significant subcategories were worse than last month.
  • Kansas City Fed manufacturing has been one of the more stable districts and their index is now well below the range seen in the last 12 months. Note that the key internals declined with new orders barely in expansion and backlog now deeply in contraction.
Weekly Rail Counts Signs economy is improving The rolling averages and the year-over-year growth is improving and in expansion. There is a correlation between rail growth and economic growth.

This week the data was mixed with the rail counts strongly showing an improving economy while the other data is saying the opposite.

My usual wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.