Wednesday, September 27, 2006

New Home Sales and Recessions

by Bill McBride on 9/27/2006 04:35:00 PM

One of the most reliable economic leading indicators is New Home Sales.

Click on graph for larger image.

New Home sales were falling prior to every recession of the last 35 years, with the exception of the business investment led recession of 2001. This should raise concerns about a possible consumer led recession in the months ahead.

The second graph shows the YoY change in New Home Sales vs. Recessions. For a description of this graph, see: Investment and Recessions

With the New Home sales data released today, including downward revisions for the last few months, this indicator is at minus 20.6%, a level that has historically signaled a recession. The one exception was in the mid '60s when the buildup for the Vietnam war kept the economy out of recession.

One of the two best economic leading indicators is now flashing recession. The other reliable indicator is an inverted yield curve, and the yield is currently inverted.

More on August New Home Sales

This graph shows August New Home sales for the last 20 years. The recent sharp drop in sales is similar to the decrease at the start of the 1990s housing bust.

August sales have fallen back to the 2002 levels.

And this graph shows YTD New Home sales through August. It now appears that 2006 will finish as the 4th best year behind 2003.

Given that sales have fallen back to 2002/2003 levels, it would seem reasonable to expect that BLS reported residential construction employment will fall back to the levels of those same years. The following chart shows BLS data for the last 6 years.

Residential Construction Employment, Monthly Average, Thousands
YearResidential buildingResidential specialty trade contractorsTotal

There will probably be 600K jobs lost in reported residential construction employment over the next couple of years - if housing stabilizes at this level. If housing continues to fall, something I think is likely, then even more jobs will be lost.