by Calculated Risk on 6/28/2022 01:53:00 PM
The recession callers are back, and some like ARK’s Cathie Wood and Home Depot’s Ken Langone claim the US is already in a recession. I disagree. We did see negative real GDP growth in Q1, and we might see negative real GDP growth in Q2 – but this doesn’t mean the US economy is in a recession.
In that 2013 post, I wrote:
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.
Unfortunately, in 2020, one of those low probability events happened (pandemic), and that led to a recession in 2020.
We’ve seen several policy errors, mostly related to immigration and trade during the previous administration, but none that would lead the economy into a recession.
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) and due to the invasion of Ukraine, the Fed has embarked on a tightening cycle to slow inflation.
One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment). I also look at the yield curve, but I’ve found new home sales is generally more useful. (See my post in 2019: Don’t Freak Out about the Yield Curve)
The arrows point to some of the earlier peaks and troughs for these three measures.
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, but this was partly due to the huge surge in sales during the pandemic. Residential investment might be peaking.
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.
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 the recent situation – we saw a YoY decline in new home sales related to the pandemic and the surge in new home sales in the second half of 2020. Ignore this 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 might be happening, but this usually leads the economy by a year or more. So, we might be looking at a recession in 2023.