I really enjoy your blog and your insights. But, always felt that whole chart reading thing to be similar to reading tea leaves. Not saying, you are incorrect, but seems like there are several areas we could have predicted a recession, i.e., falling lines, that did not occur.
Or maybe this is just me putting my head in the sand?
Kett82, i agree with your observation in general - and the burden should fall on me to explain why I think there is a cause and effect relationship between the falling line and the following recession. I'll work on it.
Housing is an important part of the economy. When the housing market slows, for whatever reason, this leads to less employment in housing related industries (construction, RE agents, mortgage brokers, etc.). So this will be a drag on the economy.
Also, since housing is a major purchase, I think falling new home sales shows how people in the aggregate are behaving - they are becoming more cautious. This behavior is somewhat self-fulfilling and can lead to slower economic growth.
Of course each recession is different: the '01 recession was mostly business investment related, the '91 recession was driven by less defense spending and the "Peace Dividend", the '73 recession was caused by the oil shock, and so on. Housing alone is not a perfect indicator - we still need to understand what was happening at the time.
I will write more - and once again, I agree with your assessment - little lines without an explanation are like reading tea leaves.
Economist Jeo Naroff of Naroof economics made this comment today about the plunge in new home sales.....
."Economist Joel Naroff of Naroff Economic Advisors says the February report has some anomalies, but could be the sign that the housing bubble is finally bursting. If so, he says, it won't be pretty.
"I have said this before but I will repeat it again: The next time a housing bubble gently deflates will be the first time a housing bubble gently deflates," Naroff said.
Draw your own conclusions. I think its over and a recession is now likely next year.
Nice chart again CR. It's interesting to see how different the '01 recession was when compared to the others in relation to new home sales. In previous downturns the new home market acted as a good leading indicator, but not in '01. I wonder why?
I would like to see this chart overlaid with a number of other things... such as Fed funds rate, 10-year treasury, or population growth.
Have you done this chart with existing home sales? I can't remember.
Anon, I don't have the historical data for existing home sales (the NAR charges for the data and I'm cheap).
The '01 recession was definitely different from the other recessions. The '01 recession was caused by a dearth of business investment, but consumer spending stayed positive. All the other recessions were consumer driven.
So your observation is correct: since the '01 recession didn't include the consumer, housing was not a good leading indicator.
Paul Krugman has mentioned this before. The '01 recession was driven by the fall in business investment and not by the fall in consumer purchases. This is very unlike the recessions after World War II which were all consumer led recessions.
The recessions before the great depression were similar to the '01 recession. Unfortunately I don't have any good studies on pre World War II recessions.
Gavin, pre WWII data is hard to find. The labor data from the BLS only goes back to 1939.
The BEA data only goes back to 1929 - so you can look at consumer vs. investment data for the Depression (Aug '29 to Mar '33) and the following recession (May '37 to Jun '38 ).
I just checked the numbers and the Depression and late 30s recession both suffered more from a lack of business investment than a drop in consumer spending (although the Depression obviously hit everything).
Although we did not quite have a full fledged housing downturn in the last recession, like every recession before it housing DID peak in 1999 and had a quite significant decline into 2001, well ahead of the eventual economic downturn.
However, I agree with the point that 2001 was a recession caused by the steepest postwar plunge in business investment. Every recession has been accompanied by a decline in business fixed investment, but the proximate cause of other postwar recessions were housing downturns, followed by consumer credit cycles that led to decline in consumer durable purchases, followed closely by massive inventory liquidation. Business fixed investment was a smaller and lagging indictor relative to these. In the last recession business investment turned down in the third quarter of 2000 (may have been second), well before the official recession date of March 2001. We also did not have a consumer credit cycle nor a major pullback in consumer discretionary spending. Yet the recession was not mild as economists would have you think. Consider:
It was the recession with the steepest y-o-y decline in S&P profits per share since 1937!!! It was also the only occasion in the postwar era that stock prices fell for three successive years (2000, 2001, and 2002). The employment recovery to the pre-recession peak took the longest since the Depression. 2005 data are not out yet, but my calculations tell me that real median household income fell for the 6th year in a row, again a postwar record. And we call that a mild recession!!! If Greenspan did not aid and abet the inflation of the housing bubble we would be in a depression.
What types of businesses have done well in those past recessions in your chart?
Food companies like Cargill & ADM or Kraft... people still have to eat.
I worked for an ag processor making fuel ethanol & food ingredients (mostly the latter) in the early 80s recession and we were positively booming... Kraft is hurting right now but the industry ingeneral always seems to do well in tough times.
This information is the first data that I feel comfortable with as a solid indicator of a decline (and I'm aware of the caveats about season, 1-month only, and possible revisions).
It's big enough, and fits the pattern - once described by commentator/economist Ben Stein about market crashes - of "slowly at first, then all of a sudden".
BTW, here in Los Angeles, on the local news, there was a peculiar segment about housing. That many people in homes today say they were glad they got in years ago (generally anytime before 2002) and how they couldn't afford their current home if they had to buy it now. It was about homeowners in Pasadena and for some reason, it felt strange. There was no "news" in the sense that homes were or were not selling. More of a philosophical excursion (and on the 5:00 PM local news!?).
Maybe there's a mood change or something. There has been for some time an awareness of low affordability in California - but usually reported as a statistic (e.g. 16%). But here there was a "Gee, things are kind of out of whack" report on television.
Where to begin? Our Father which art in Heaven? We'll just have to wait and see. It sure looks dicey to me, and I've been looking at this stuff for forty years. As usual, CR is on the case. Well, time for more Shiraz.
we are headed for recession, and the fall of housing sales and prices is the dead canary in the tunnel. our global economy is putting all countries on the path of wage equalization. as u.s. wages go down, china's wages will go up. this will be a long and painful process for the average american worker. as the economies of china, india, the asian tiger countries, brazil and the eastern european countries rise, the economies of the u.s., and the western european countries, must fall.
japan, and western europe,with their rapidly shrinking populations, must eventually shrink their domestic economies. the u.s., with its poorly educated and over paid workers (compared to those in the emerging economic powers), is on a continually downward slope.
I believe your cause and effect will
prove true. I always try to look ahead at what will prop up or drag down the economy. I only see drag.
And for the next decade or so.
At least here in the US. I don't think it will be as difficult in other places... Asia in particular if they can ever get internal demand cycling. A big 'IF' I admit.
We have been waiting for 2000 years for Asian economies to start their internal engines! I am not sure we are at a major turning point in history here.
Asia, especially China and India, have since Roman times sent goods and accumulated specie (gold in the case of india and silver in the case of China). With deindustrialization this pretty much became a trickle and in india's case a trade deficit (mainly because of oil and capital goods) by the mid twentieth century. But is it a surprise that as they recover their mojo, they are back to running surpluses (again India runs a deficit largely due to oil and because it does not count software exports in goods and services).
P.S. The good DoctorWHo is still probably in the breakroom, maybe somebody needs to break the news about new home sales. After all that fuss he made about bubbleheads and about CR's forecast, I wonder what his forecast was for new home sales. Better still, let him be in the break room. When he comes back like Rip Van Winkle, he may not recognize the housing market.
Yes, I was paged and awaken from my nap in the break room with BabsBush, only to see you lot trembling, twitching, sweating, and leaping with glee at what you are certain is the curtain call of evidently not only the entire US housing market, but all of western civilization as we know it.
All that from a prelim. report for February, eh? That is truly some funny shit, and worth getting up off the couch to watch. However, any real estate market going from ~+15% to ~+5% will see inventory and sales volume adjusting in magnitudes in relation to median price. Stickiness. If you thought that term was a made-up, NAR conspiracy term, youre about to learn otherwise.
One of the most morbidly fascinating elements of Bubblehead-watching is just this; the declarations of not only victory at the appearance of any negative data, but the extrapolation of that data into long term, even decades long, projections of catastrophic scenarios.
Not only are my yearly projections unchanged, but I believe they are the only projections tendered by anyone who posts here regularly.
A decelerating real estate market is not a uniform, homogenous event. Here in CA the Sacto./Central valley market is overpriced and will see nominal price declines, as they already have, and will soon see YoY declines in conjunction with the much higher inventories and much lower sales volumes that are occurring now. The same will likely happen in the IE next year. But the Bay Area and SoCal? Nope. Soft Landing City, barring severe unemployment or spiking interest rates, and these latest numbers could ensure a stable or even declining rate environment going into the second half of this year.
In other words, in order to get from +15% to +5%, some localities will go -10%, and getting there will mean a fairly drastic increase in inventory and reduction in sales velocity. But the farfetched Bubblehead scenarios will not occur without some extreme exogenous events.
As I've said before, page me when unemployment and interest rates spike.
Interesting analysis of the California market DoctorWho. But I'm surprised you think that the Central valley(CV)/Inland Empire (IE) market is almost a separate market from the coasts (San Francisco, Los Angeles, San Diego).
According to the figures I have about the SF Bay Area
1. About 5% of the workers commute in from outside the nine county Bay Area, mainly the central valley. As home prices are set on the extreme margin (just 126,123 homes were sold in the Bay Area in 2005: about 5% of all homes), if more commuters move to the central valley because of falling prices, homes in the Bay Area will get cheaper.
There is evidence that many of the investors buying homes in the CV/IE region are home owners in the Bay Area/SoCal. When home prices fall away from the coasts they will cut spending (wealth effect and all)
Home builders & mortgage companies' jobs depend on sales volume. And as sales volume drops in the CV/IE region employement will be hurt especially in SoCal.
If inventory increases/sales volume falls in the CV/IE region, you will see unemployment rise in coastal California.
Dry is describing the world of my youth of the 1950s and my father's before me.
Folks lived near work and either walked or rode a bus. Families generally had a single car.
Assuming an energy shortage and a lack of US exports to pay for energy, then that world will have to reappear in some form. Likely mass transit on a huge scale.
An aside, here on imagination. If you were going to design a robot to wash dishes, would you design one with arms to grasp the dish and wash it. Or like a car wash and use streams of water to clean.
Likewise declaring the 'burbs dead and useless may be a lack of imagination. There will have to be changes especially less cars. And coventants may have to be rewritten to allow small business in former exclusive developements. God knows how the McMansion will be recycled. But they will. There will be blood baths of NIMBY for rails.
But if it is to be, then it will be.
As to the overpaid US worker and reeducation. Well in a capsule, after the Scopes Monkey trial, science took a back seat until WWII and then the Cold War. Someone will panic and revise the US education system. It'd be nice to think that our hyper overpaid leadership elites would have thought it out. But they didn't.
As we have seen in predicting the housing bubble pop, predicting the future is very chancy.
RE: what kinds of stocks will do well in a recession? Historically consumer staples names have done well but the current earnings growth expectations for the group are very low and the sector has the third highest P/E ratio of any sector, (after tech and health care). Not sure that is a great place to put your bets. For more info on earnings expectations go to zacks.com
CR, how did the warm weather in jan affect jan/feb seasonally adjusted numbers? the various graphs of data seem to suggest feb was an anomoly.
Dear CR
I really enjoy your blog and your insights. But, always felt that whole chart reading thing to be similar to reading tea leaves. Not saying, you are incorrect, but seems like there are several areas we could have predicted a recession, i.e., falling lines, that did not occur.
Or maybe this is just me putting my head in the sand?
Best regards,
Kett82
Kett82, i agree with your observation in general - and the burden should fall on me to explain why I think there is a cause and effect relationship between the falling line and the following recession. I'll work on it.
Housing is an important part of the economy. When the housing market slows, for whatever reason, this leads to less employment in housing related industries (construction, RE agents, mortgage brokers, etc.). So this will be a drag on the economy.
Also, since housing is a major purchase, I think falling new home sales shows how people in the aggregate are behaving - they are becoming more cautious. This behavior is somewhat self-fulfilling and can lead to slower economic growth.
Of course each recession is different: the '01 recession was mostly business investment related, the '91 recession was driven by less defense spending and the "Peace Dividend", the '73 recession was caused by the oil shock, and so on. Housing alone is not a perfect indicator - we still need to understand what was happening at the time.
I will write more - and once again, I agree with your assessment - little lines without an explanation are like reading tea leaves.
Best Wishes.
Economist Jeo Naroff of Naroof economics made this comment today about the plunge in new home sales.....
."Economist Joel Naroff of Naroff Economic Advisors says the February report has some anomalies, but could be the sign that the housing bubble is finally bursting. If so, he says, it won't be pretty.
"I have said this before but I will repeat it again: The next time a housing bubble gently deflates will be the first time a housing bubble gently deflates," Naroff said.
Draw your own conclusions. I think its over and a recession is now likely next year.
Nice chart again CR. It's interesting to see how different the '01 recession was when compared to the others in relation to new home sales. In previous downturns the new home market acted as a good leading indicator, but not in '01. I wonder why?
I would like to see this chart overlaid with a number of other things... such as Fed funds rate, 10-year treasury, or population growth.
Have you done this chart with existing home sales? I can't remember.
Anyway... thanks for the good work.
Anon, I don't have the historical data for existing home sales (the NAR charges for the data and I'm cheap).
The '01 recession was definitely different from the other recessions. The '01 recession was caused by a dearth of business investment, but consumer spending stayed positive. All the other recessions were consumer driven.
So your observation is correct: since the '01 recession didn't include the consumer, housing was not a good leading indicator.
Best Regards.
Paul Krugman has mentioned this before. The '01 recession was driven by the fall in business investment and not by the fall in consumer purchases. This is very unlike the recessions after World War II which were all consumer led recessions.
The recessions before the great depression were similar to the '01 recession. Unfortunately I don't have any good studies on pre World War II recessions.
Any good links?
Gavin, pre WWII data is hard to find. The labor data from the BLS only goes back to 1939.
The BEA data
only goes back to 1929 - so you can look at consumer vs. investment data for the Depression (Aug '29 to Mar '33) and the following recession (May '37 to Jun '38 ).
I just checked the numbers and the Depression and late 30s recession both suffered more from a lack of business investment than a drop in consumer spending (although the Depression obviously hit everything).
Best Wishes.
cr,
Throw in an inverted yield curve into the mix and persistently high energy prices, and I'd say you have the perfect formula for a recession.
CR,
Although we did not quite have a full fledged housing downturn in the last recession, like every recession before it housing DID peak in 1999 and had a quite significant decline into 2001, well ahead of the eventual economic downturn.
However, I agree with the point that 2001 was a recession caused by the steepest postwar plunge in business investment. Every recession has been accompanied by a decline in business fixed investment, but the proximate cause of other postwar recessions were housing downturns, followed by consumer credit cycles that led to decline in consumer durable purchases, followed closely by massive inventory liquidation. Business fixed investment was a smaller and lagging indictor relative to these. In the last recession business investment turned down in the third quarter of 2000 (may have been second), well before the official recession date of March 2001. We also did not have a consumer credit cycle nor a major pullback in consumer discretionary spending. Yet the recession was not mild as economists would have you think. Consider:
It was the recession with the steepest y-o-y decline in S&P profits per share since 1937!!! It was also the only occasion in the postwar era that stock prices fell for three successive years (2000, 2001, and 2002). The employment recovery to the pre-recession peak took the longest since the Depression. 2005 data are not out yet, but my calculations tell me that real median household income fell for the 6th year in a row, again a postwar record. And we call that a mild recession!!! If Greenspan did not aid and abet the inflation of the housing bubble we would be in a depression.
What types of businesses have done well in those past recessions in your chart?
What types of businesses have done well in those past recessions in your chart?
Food companies like Cargill & ADM or Kraft... people still have to eat.
I worked for an ag processor making fuel ethanol & food ingredients (mostly the latter) in the early 80s recession and we were positively booming... Kraft is hurting right now but the industry ingeneral always seems to do well in tough times.
This information is the first data that I feel comfortable with as a solid indicator of a decline (and I'm aware of the caveats about season, 1-month only, and possible revisions).
It's big enough, and fits the pattern - once described by commentator/economist Ben Stein about market crashes - of "slowly at first, then all of a sudden".
BTW, here in Los Angeles, on the local news, there was a peculiar segment about housing. That many people in homes today say they were glad they got in years ago (generally anytime before 2002) and how they couldn't afford their current home if they had to buy it now. It was about homeowners in Pasadena and for some reason, it felt strange. There was no "news" in the sense that homes were or were not selling. More of a philosophical excursion (and on the 5:00 PM local news!?).
Maybe there's a mood change or something. There has been for some time an awareness of low affordability in California - but usually reported as a statistic (e.g. 16%). But here there was a "Gee, things are kind of out of whack" report on television.
Where to begin? Our Father which art in Heaven? We'll just have to wait and see. It sure looks dicey to me, and I've been looking at this stuff for forty years. As usual, CR is on the case. Well, time for more Shiraz.
Prosit!
we are headed for recession, and the fall of housing sales and prices is the dead canary in the tunnel. our global economy is putting all countries on the path of wage equalization. as u.s. wages go down, china's wages will go up. this will be a long and painful process for the average american worker. as the economies of china, india, the asian tiger countries, brazil and the eastern european countries rise, the economies of the u.s., and the western european countries, must fall.
japan, and western europe,with their rapidly shrinking populations, must eventually shrink their domestic economies. the u.s., with its poorly educated and over paid workers (compared to those in the emerging economic powers), is on a continually downward slope.
I believe your cause and effect will
prove true. I always try to look ahead at what will prop up or drag down the economy. I only see drag.
And for the next decade or so.
And for the next decade or so.
At least here in the US. I don't think it will be as difficult in other places... Asia in particular if they can ever get internal demand cycling. A big 'IF' I admit.
dryfly, If they ever do get their internal engine started, that would
not bode well for the US.
We have been waiting for 2000 years for Asian economies to start their internal engines! I am not sure we are at a major turning point in history here.
Asia, especially China and India, have since Roman times sent goods and accumulated specie (gold in the case of india and silver in the case of China). With deindustrialization this pretty much became a trickle and in india's case a trade deficit (mainly because of oil and capital goods) by the mid twentieth century. But is it a surprise that as they recover their mojo, they are back to running surpluses (again India runs a deficit largely due to oil and because it does not count software exports in goods and services).
P.S. The good DoctorWHo is still probably in the breakroom, maybe somebody needs to break the news about new home sales. After all that fuss he made about bubbleheads and about CR's forecast, I wonder what his forecast was for new home sales. Better still, let him be in the break room. When he comes back like Rip Van Winkle, he may not recognize the housing market.
Yes, I was paged and awaken from my nap in the break room with BabsBush, only to see you lot trembling, twitching, sweating, and leaping with glee at what you are certain is the curtain call of evidently not only the entire US housing market, but all of western civilization as we know it.
All that from a prelim. report for February, eh? That is truly some funny shit, and worth getting up off the couch to watch. However, any real estate market going from ~+15% to ~+5% will see inventory and sales volume adjusting in magnitudes in relation to median price. Stickiness. If you thought that term was a made-up, NAR conspiracy term, youre about to learn otherwise.
One of the most morbidly fascinating elements of Bubblehead-watching is just this; the declarations of not only victory at the appearance of any negative data, but the extrapolation of that data into long term, even decades long, projections of catastrophic scenarios.
Not only are my yearly projections unchanged, but I believe they are the only projections tendered by anyone who posts here regularly.
A decelerating real estate market is not a uniform, homogenous event. Here in CA the Sacto./Central valley market is overpriced and will see nominal price declines, as they already have, and will soon see YoY declines in conjunction with the much higher inventories and much lower sales volumes that are occurring now. The same will likely happen in the IE next year. But the Bay Area and SoCal? Nope. Soft Landing City, barring severe unemployment or spiking interest rates, and these latest numbers could ensure a stable or even declining rate environment going into the second half of this year.
In other words, in order to get from +15% to +5%, some localities will go -10%, and getting there will mean a fairly drastic increase in inventory and reduction in sales velocity. But the farfetched Bubblehead scenarios will not occur without some extreme exogenous events.
As I've said before, page me when unemployment and interest rates spike.
Interesting analysis of the California market DoctorWho. But I'm surprised you think that the Central valley(CV)/Inland Empire (IE) market is almost a separate market from the coasts (San Francisco, Los Angeles, San Diego).
According to the figures I have about the SF Bay Area
1. About 5% of the workers commute in from outside the nine county Bay Area, mainly the central valley. As home prices are set on the extreme margin (just 126,123 homes were sold in the Bay Area in 2005: about 5% of all homes), if more commuters move to the central valley because of falling prices, homes in the Bay Area will get cheaper.
If inventory increases/sales volume falls in the CV/IE region, you will see unemployment rise in coastal California.
Cargill is privately owned. Kraft is trading at a P/E of 19, so not too overvalued. I like to stick w/ PEs of 15 or less.
Does anyone else know what stocks do well in a recession?
Dry is describing the world of my youth of the 1950s and my father's before me.
Folks lived near work and either walked or rode a bus. Families generally had a single car.
Assuming an energy shortage and a lack of US exports to pay for energy, then that world will have to reappear in some form. Likely mass transit on a huge scale.
An aside, here on imagination. If you were going to design a robot to wash dishes, would you design one with arms to grasp the dish and wash it. Or like a car wash and use streams of water to clean.
Likewise declaring the 'burbs dead and useless may be a lack of imagination. There will have to be changes especially less cars. And coventants may have to be rewritten to allow small business in former exclusive developements. God knows how the McMansion will be recycled. But they will. There will be blood baths of NIMBY for rails.
But if it is to be, then it will be.
As to the overpaid US worker and reeducation. Well in a capsule, after the Scopes Monkey trial, science took a back seat until WWII and then the Cold War. Someone will panic and revise the US education system. It'd be nice to think that our hyper overpaid leadership elites would have thought it out. But they didn't.
As we have seen in predicting the housing bubble pop, predicting the future is very chancy.
But if it is to be, then it will be.
Yup and somebody will make a buck doing it. Won't be me though... I'll be fishing & gardening & cutting fire wood.
RE: what kinds of stocks will do well in a recession? Historically consumer staples names have done well but the current earnings growth expectations for the group are very low and the sector has the third highest P/E ratio of any sector, (after tech and health care). Not sure that is a great place to put your bets. For more info on earnings expectations go to zacks.com
Check that out! Ouch!
Denver newspaper, with the latest Colorado news, sports, weather and entertainment : Rocky Mountain News
Well, you can read that research paper on real estate and business cycles :
Real Estate and Business Cycles: