Economic Data Tracker –
Housing pain continued in December 

Trend watch and what’s new this week

Interestingly, much of the activity-based data (slides 5 and 6) has been firming after being skewed by the holidays. Hotel occupancy, dining reservations, and air passenger counts all improved week-over-week (WoW). In fact, air passenger counts are now up 33.5% compared to the same week in January ’22, which is nearly a half million more passengers per day.  Similarly, rail freight carloads have surged during the first two full weeks of ’23, though carloads dropped 10% during December.

Consumer spending backpedaling

On slide 3, we show retail & food sales, which fell 1.1% in December, the third month-over-month (MoM) decline in the past four months. Gasoline and auto sales, which together comprise almost a third of total sales, declined for the month. Excluding both, sales are just under the all-time high. Food service and drinking establishments sales also slipped. We would warn, however, that retail sales can be erratic month-to-month and have historically been an unreliable recession indicator.

More weakness within housing

Several key housing metrics were released this week, nearly all of which continued to weaken. We attribute all of this to dramatically higher mortgage rates, which have surged nationally throughout 2022. Of course, higher rates hurt housing affordability.

Existing home sales (slide 8) dropped for the 11th straight month to the lowest annualized level since the pandemic shutdown months. Meanwhile, prices fell for the sixth month in row. Still, prices aren’t falling as much as you’d might guess as they continue to be supported by low inventories, with prices nearly 35% above 2019 levels.

On slide 9, new housing starts dropped for the 8^th time in 12 months in December. Meanwhile, new building permits fell 1.6% MoM, down for the fifth time in six months. Additionally, we show the National Association of Home Builders (NAHB) traffic of prospective buyers index and the NAHB Housing Market Index, which gauges homebuilders’ confidence. Both weakened considerably in 2022, nearing the lows of the pandemic, but turned up in January, offering a glimmer of hope.

Differences between single-family vs. multifamily

On slide 10, we highlight the different trends of single-family permits compared to multifamily. Single-family permits have fallen for 10 months in a row. However, multifamily increased in December for the fourth time in the past seven months. This appears to be related to housing affordability pressures primarily driven by the dramatic home price appreciation post-pandemic and increased mortgage rates, whereby some potential homeowners are unable to purchase single-family homes. It also relates to the longer planning cycle for multifamily residential building.

Weakness elsewhere, too

On slide 11, we show a key metric within the freight gauges, unit volumes of shipping containers, which stabilized in December, snapping a six-month plunge in volumes. Still, unit volumes are down 28.2% over that span and are well-below the long-term trend. Nonetheless, the sharp pullback in freight is not a good sign for overall economic growth in the near term.

Our take

Let’s be clear – the U.S. economy continues to slow. There are glimmers of stabilization, which are encouraging; however, the overall trend does appear to be weakening.

Most of the recession flags we monitor tripped months ago. No, that doesn’t mean a recession is inevitable, which we have repeatedly mentioned here.

Yet, the U.S. economy is huge and complex, more akin to an aircraft carrier than a small pleasure boat. Most people underappreciate the large role momentum plays in the economy, especially considering that many businesses have long lead times depending on the industry. And that aircraft carrier is now decelerating, making it increasingly difficult to change course (grow faster). 

Conversely, don’t expect that aircraft carrier to come to a screeching halt. Recessions tend to be slow-motion affairs rather than sudden collapses or action-packed thrillers. While it’s possible events could repeat, we’d warn against recency bias in trying to draw parallels between the current period and the two most recent recessions – the Great Financial Crisis (2007-2009) and the COVID-19 Pandemic Shutdown. The current circumstances are very different than both of those periods for a multitude of reasons; most notably, the inflation dynamics. Furthermore, we view comparisons to the 1970s, which was the last big inflation-related recession, as equally misplaced. Each recession has unique drivers and dynamics.

Which brings us to an obvious question: the timing of a recession. Two quotes sum up forecasting a recession. The first is from Niels Bohr, the Physics Nobel laureate and father of the atomic model, who said, “Prediction is very difficult, especially if it’s about the future!” The other is from the late, great Yogi Berra, "It ain't over 'til it's over.“ It, in this case, is the business cycle. Both quotes apply in this regard and are important to keep in mind when thinking about the timing.

We can point to just as many reasons why a recession will occur along with plenty of reasons for how we could sidestep it. Still, the weight of the evidence leads us to seeing a recession in the coming 12 months, which remains our base case. 

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