Donald Trump’s boast about the economy are being undercut by housing data, a forward-looking indicator that points to a downturn ahead. (Photo: Dwight Burdette/ MPG collage)
Donald Trump boasts the economy is one of his biggest successes based on strong monthly job gains. But one of the economy’s principal leading indicators–the housing sector–is already flashing ominous signs of a looming recession.
“The potential for an economic downturn has been highly discussed over the past few months as more signals of a recession come into alignment,” BuildFax CEO Holly Tachovsky said earlier this month.
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BuildFax has been tracking the single family home market daily, as well as interest rate activity, changes to home prices and housing supply growth. It sees a “stark” change that does not bode well for the nation.
“While this is only the second consecutive month of declining indicators, this shift is in stark contrast to the white-hot housing market that the U.S. has experienced since 2013,” Tachovsky said.
Trump is really like the guy who fills up a car with gas, then claims credit for building the whole car.
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The economic expansion is actually 10 years old. It began during the Obama administration. Trump simply inherited it. While the expansion has continued, it’s starting to show its age.
Trump’s $1.4 trillion tax cut has spurred growth, but its impact has largely been short-term. It’s long-term impact, reflected in a ballooning deficit, will exacerbate the recession.
The telltale signs are already evident in one of the economy’s principal leading indicators. House sales, new home construction and new housing permits are all gauges of future economic activity, and the outlook isn’t good.
“Historically, when compared to other factors, U.S. housing authorization activity has one of the highest correlations with each economic downturn between 1961 and 2018,” according to BuildFax.
After two consecutive months of increases, existing-home sales declined in December, according to the National Association of Realtors. None of the four major U.S. regions saw a gain in sales activity last month.
Total existing home sales–completed transactions that include single-family homes, townhomes, condominiums and co-ops–fell by 6.4 percent from November to a seasonally adjusted rate of 4.99 million units, according to the NAR.
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Sales are now down 10.3 percent from a year ago (5.56 million units in December 2017). Properties typically stayed on the market for 46 days in December, up from 42 days in November and 40 days a year ago.
The federal government shutdown did not show up significantly in December sales, “but the uncertainty of a shutdown has the potential to harm the market,” said NAR President John Smaby.
Homebuilders also raised a red flag in December. A key index of homebuider sentiment fell four points in December to 56, the lowest reading since May 2015, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
The index plummeted nearly 20 points over the past year, largely because potential home buyers pulled back in the face of rising interest rates, triggered by the rising Trump deficit.
“This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply-side costs to keep home prices competitive for buyers at different price points,” says NAHB Chief Economist Robert Dietz.
Interest rates going forward will be a key factor in the economy and housing market’s health.
The Federal Reserve last month raised its benchmark interest rate a quarter-point, setting the target for its benchmark funds rate to 2.25 percent to 2.5 percent. It was the fourth increase in the past year.
President Trump railed against the hike on Twitter. He called it “incredible” that “the Fed is even considering yet another interest rate hike.” The Fed is calling for two more hikes in 2019, although it has pulled back on a planned third hike.
In a major address on the economy during the 2016 presidential campaign, Trump boasts his plans for tax cuts, better trade deals and more manufacturing jobs would generate 4 percent economic growth per year.
At the time, economists scoffed at the claim and their skepticism has been borne out. Despite the massive tax cut, 2018 economic growth is expected to fall short at about 3 percent on the year.
For 2019, GDP is now seen rising by only 2.3 percent, about the historic norm, according to the Federal Reserve.
Long term, the Fed estimates GDP growth of 1.8 percent to 1.9 percent, in line with estimates by the non-partisan Congressional Budget Office. The CBO projects real GDP is projected to grow by about 1.7 percent each year from 2023 to 2028.
The tax-cut fueled deficit is becoming a big drag on the economy. It soared 17 percent in fiscal year 2018, hitting $782 billion, according to the CBO. That amounts to 3.9 percent of gross domestic product (GDP), up from 2.4 percent the year before. It’s expected to hit $1 trillion in 2019.
So far, mortgage interest rates have taken the biggest hit from the tax cut and soaring deficit. They jumped in 2017 and rose again this past September to the highest level in eight years. Rates are a full percentage point higher than a year ago, despite a slight rebound in November.
Mortgage rates, in turn, have stymied the housing sector. Current sales conditions fell 6 points to 61, sales expectations in the next six months dropped 4 points to 61, and buyer traffic fell 2 points to 43, according to the NAHB/Wells Fargo Index.
One of the few bright spots is the relatively low inflation rate. It fell to 1.9 percent from 2.1 percent in 2018 and is projected to be 2 percent in 2019. The longer-run expectation remains 2 percent, according to the Federal Reserve.
Although inflation is low, it’s still eating into meager wage gains. Inflation-adjusted average hourly wages did not grow at all between June 2017 and June 2018, according to the Current Employment Statistics survey.
The trend was “mildly surprising” given the historically low unemployment rate of 4.0 percent, according to the Economic Policy Institute.
Trump boasts about the return of manufacturing jobs has also failed to materialize. Manufacturing employment is a third lower — by about 6 million jobs — than it was in 1980, and still below 2008 levels around the time of the Great Recession, according to MarketWatch.
“The number of factory jobs, today, is the same as it was the day Pearl Harbor was attacked. All the jobs haven’t come back,” the financial Web site noted.
“Trump’s trade war has helped some industries, but has hurt others, and is at best a wash on manufacturing employment. Slumping manufacturing productivity growth has also flattened the employment gains,” Moody’s Analytics chief economist Mark Zandi told the site.
The deficit has never been this high during a good economy. The situation means Trump is going to have less flexibility to pump up the economy during a downturn or a crisis.
And indicators are suggesting, Trump boasts aside, a recession is just around the corner.