Recent strength in the housing market suggests that the US economy may have dodged a recession, according to Carson Group global macro strategist Sonu Varghese.
In a Wednesday note, he highlighted strong data on housing starts, which surged 21.7% in May to 1.63 million units, posting its biggest percentage gain in three decades. That’s a big deal because weakness — not strength — in housing starts data has historically foreshadowed recessions.
Housing starts measure the groundbreaking of a foundation and precedes sales of new homes as well as spending on home goods and appliances. It also tells you a lot about home builders’ sentiment, which has been rising since the start of the year.
“Housing historically bottomed prior to the end of a recession and has typically led the economy out of one… Homebuilder sentiment, perhaps the best leading indicator for housing activity, has been surging since the end of last year. They’re clearly feeling much better about future demand,” Varghese said.
While housing starts weakened last year as mortgage rates surged, the recent rebound suggests the odds of a recession have decreased significantly, especially compared to economist expectations.
“Single-family starts surged 19% in May. Meanwhile, economists expected a small fall in starts, once again highlighting the disconnect between what’s happening in the economy and expectations,” he said, adding that building permits jumped 5% in May and are up 13% since November.
“Builders wouldn’t be looking to get new construction authorized if they were pessimistic about the housing market.”
All-in, the recent strength in housing market data signals to Varghese that the economy is not in a recession, nor is it close to entering one in the next couple of months. Additionally, the data suggests that the US economy is not in a late cycle, nor is it on the precipice of entering a recession within the next six months.
“If anything, the current dynamics are akin to what we see early in an economic expansion, which goes against forecasts that predict a recession soon. What’s clear is that 7% mortgage rates are not deterring new home buyers… At the end of the day, if someone wants a house, they’re going to buy a house,” he said.
Other factors that give him confidence that the US economy dodged a recession and is most likely still in expansion mode includes continued strength in consumption, growing real incomes as inflation falls, the likely end of interest rate hikes from the Fed, easing supply chain disruptions, and a pickup in manufacturing activity.
“You can see why we’re optimistic about the economy,” Varghese said.
Source : MarketsInsider
