The Next Dominoes Fall: Housing Under Construction And Heavy Truck Sales

Introduction

In his somewhat famous lecture from 15+ years ago, Professor Edward Leamer proclaimed that “Housing IS the Business Cycle.” In that lecture, he identified the sequence as: first housing turns, then vehicle sales and other durable purchases turn, then consumer nondurables turn.

Economic releases in the past several weeks have advanced this progression significantly.

After a lengthy delay, housing construction has rolled over

Several weeks ago, I wrote in “A Closer Look At The Logjam In The Fed’s Housing Transmission Mechanism” that the pandemic had created a supply bottleneck in housing materials. This had the result that, even though the Fed had raised rates at the most brisk pace in 40 years, and even though housing permits and starts had declined sharply, the number of housing units under construction – the real economic activity in new housing units – had continued to rise many months later.

With Thursday’s release of residential construction for February, that has come to an end. Not only did housing units under construction decline during the month, but there were downward revisions to both December and January, with the end result that units under construction can now be seen to have almost certainly peaked last October, and are now -1.2% lower:

As also shown in the above graph, residential construction employment has been growing at ever-lower rates. In the past, it has taken several months, and a significant downturn in construction before employment itself turns lower. As a result, we should expect employment in that sector to roll over within the next few months. At that point, all three leading sectors of employment – temporary help, manufacturing, and residential construction – will point to a downturn in total payrolls soon.

Heavy trucks and light vehicles

Not only has the interest rate transmission logjam in housing been broken, but the second domino in Leamer’s progression appears also to have definitively turned.

Let’s start with a comparison of light vehicle sales (blue) and heavy truck sales (red) on a monthly basis:

As you can see, both typically turn down sharply before a recession begins. But light vehicle sales are much noisier than heavy truck sales, making it much more difficult to decipher signal. When we display the above data on a quarterly basis, the signal is much more clear:

Usually – but not always – heavy truck sales turn down before light vehicle sales. Further, when they do turn down at least 10% from their peak, the outcome is almost always definitive.

So let’s compare heavy truck sales (red) and housing permits (blue):

Just as Prof. Leamer stated in his lecture, housing leads vehicle sales.

Now, let’s zoom in on the past year:

In February, heavy truck sales declined over 10%. While not unprecedented, it would be very unusual for truck sales to rebound fully from this decline. In short, it appears that truck sales have rolled over.

The remaining dominoes to fall

According to Leamer, after housing and vehicles, the next in line to turn are durable goods generally, followed by consumer durables. Here’s what they look like currently:

Both appear on the cusp of rolling over, but have not definitively done so yet.

Conclusion

The effects of the Fed rate hikes on the real economy have been relatively muted because of the pre-existing supply chain bottlenecks. As those have been alleviated, the logjam in the Fed’s transmission mechanism appears to have broken. All phases of housing construction have now rolled over, and most likely heavy truck sales have as well.

As a result, we can expect the remaining leading components of payrolls to also turn down shortly. That leaves jobless claims as virtually the last short-leading indicator standing before we can expect the final crucial coincident measures of the economy to turn.