By 
by Calculated Risk on 12/07/2022 02:41:00 PM
The recession callers were back in the first half of 2022, and some like ARK’s Cathie Wood and Home Depot’s Ken Langone claimed the US was already in a recession. I disagreed and noted I wasn’t even on recession watch!
3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.emphasis added
Unfortunately, in 2020, one of those low probability events happened (pandemic), and that led to a recession in 2020.
Refusing to “pay the bills” (not raising the debt ceiling), would be a policy error – but that seems unlikely (you never know).
And this most common cause of a recession is the current concern. Since inflation picked up, mostly due to the pandemic (stimulus spending, supply constraints, WFH impacts on household formation) and due to the invasion of Ukraine, the Fed has embarked on a tightening cycle to slow inflation.
Click on graph for larger image.
The arrows point to some of the earlier peaks and troughs for these three measures – and the most recent peak.
The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.
New home sales and single-family starts turned down last year, but that was partly due to the huge surge in sales during the pandemic – and then rebounded somewhat. Now both new home sales and single-family starts have turned down in response to higher mortgage rates. Residential investment has also peaked.
The second graph shows the YoY change in New Home Sales from the Census Bureau. Currently new home sales (based on 3-month average) are down 13% year-over-year.
Note: the New Home Sales data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.
Some observations:
1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. An exception for this data series was the mid ’60s when the Vietnam buildup kept the economy out of recession. Another exception was in late 2021 – we saw a significant YoY decline in new home sales related to the pandemic and the surge in new home sales in the second half of 2020. I ignored that pandemic distortion.
2) It is also interesting to look at the ’86/’87 and the mid ’90s periods. New Home sales fell in both of these periods, although not quite 20%. As I noted in earlier posts, the mid ’80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid ’90s, nonresidential investment remained strong.
If the Fed tightening cycle will lead to a recession, we should see housing turn down first (new home sales, single family starts, residential investment). This has happened, but this usually leads the economy by a year or more. So, we might be looking at a recession in 2023.
Comments