Are new home prices declining, or is the size of a new home just getting smaller?

A bit of both.

Here's some data.

1/5 The median sq ft of a new single-family housing start has declined in recent years, falling from 2,335 sq ft in 2022 to 2,156 sq ft in Q4 2023.

The median sales price of a new single-family home has been declining since Q3 2022, falling from ~$480,000 to $422,000.

2/5

Is the quality of the BLS jobs data worsening?

Let's talk about the response rate to the BLS data and some ways we can get a more complete answer on the labor market.

A quick thread:

1/ The BLS Employment Situation report has two major surveys: the Household and the Establishment.

2/

Historically, when nominal growth is lower than overnight policy rates, capital is sucked out of the real economy and into short-term government securities (crowding out), which starves the real economy of resources and furthers the deceleration in nominal growth.

1/4 We see this dynamic unfolding in real-time as real bank loan growth has contracted since August 2023.

2/4

How does this Business Cycle compare to cycles of the past?

That depends on what part of the Business Cycle Sequence you are looking at.

The following charts map the performance of Leading, Cyclical, and Aggregate Indicators compared to past Business Cycles 👇

1/ Traditional Leading Indicators continue to perform poorly, worse than the average of past cycles.

This chart maps the cumulative monthly performance of the Leading Economic Index after the 10YR3M spread initially inverted.

2/

State-level Coincident Indexes tell us about how trends in economic growth are spreading across the country.

Montana is a disaster!

One key element of Business Cycles is the spreading or "diffusion" of trends.

Let's see what the most recent state-level data is saying 👇

1/ As a reminder, Coincident Indexes tell us what's happening right now. They are not Leading Indexes.

Coincident Indexes define recessionary periods so a negative coincident growth rate is definitionally a recession.

2/

Manufacturing production has contracted for 14 consecutive months.

The average growth rate of manufacturing production in 2022 was 2.0%

In 2023, growth averaged -0.7%.

1/4 Manufacturing production has been down about 1% since the yield curve inverted in November 2022.

On average, manufacturing production rises for about 9 months after the yield curve inverts.

Today's trajectory is weaker than average.

2/4

Market Concentration and The "Liquidity Ladder":

1/6 The largest 500 companies, weighted by market cap, have pushed back to all-time highs.

2/6

Before the Great Financial Crisis, real GDP per capita maintained a trend growth rate of 2.1%.

The economy's growth rate fell off and never recovered post-GFC.

If we continued on the pre-GFC trendline, the standard of living would be $77,500 per person compared to $67,000.

1/5 The right-hand chart shows the gap vs. the pre-GFC trend.

This goes a long way to explain the current pessimism in consumer sentiment.

Long-run income is an important concept in economics, and people are consistently falling short of their previous long-run projections.

2/5

The aging of the global population...

Over the next two decades, the four major economic regions of the world will have stronger population growth in the 65+ category compared to the 25-64 cohort.

1/ Why is this important?

Income, consumption, and taxation all follow a life-cycle trend.

While this is US data, the same trends apply globally. Your consumption peaks in your 40s and 50s and starts to decline sharply after 65.

2/

A lot of debate exists between the Establishment and Household surveys of employment.

The Establishment data showed an increase of 216,000 jobs while the Household data showed a decline of 683,000 jobs, the largest since the April 2020 lockdowns.

1/7 The main problem with the Household data is that it's very volatile.

The big problem with the Establishment data is that it's very lagging due to its modeled smoothness.

2/7

In November, 31% of the Philly Fed State Coincident Indexes contracted on a 3-month basis, up from 23% in October.

1/5 In November, 12% of the state coincident indexes contracted on a 6-month basis, up from 10% in October.

2/5

The most positive thing from the employment report was the decline in the unemployment rate from 3.9% to 3.7%.

This decline lowered the Sahm Rule from 0.33 to 0.30.

1/ This fractional decline led to a spiking of the football for the soft landing camp which is curious given the history of the Sahm Rule.

As covered below, we know the Sahm Rule is not a leading indicator.

2/

https://x.com/EPBResearch/status/1732419936847597983?s=20

The Sahm Rule is one of the most well-known recession indicators in economics.

The Sahm Rule indicator has risen sharply in recent months but it won't be triggered in Friday's jobs report.

Let's review the Sahm Rule, what it says now, and if this time will be different...

1/ The Sahm Rule takes the trailing 3-month average of the U3 unemployment rate.

If the current 3M average unemployment rate rises 0.5% above the trailing 12M minimum, the rule has been triggered and a recession is already underway.

2/

There is no sound reason to prefer GDP over GDI.

But there's also no good reason to use GDI instead of GDP.

The best practice is to use both.

Bulls are using GDP.

Bears are using GDI.

The answer lies somewhere in the middle.

1/11 GDP measures the value of goods and services produced.

GDI measures aggregate income received.

These two measures should arrive at the same number, but they aren't always exactly the same.

Certainly not before extensive revisions.

2/11

The price of newly constructed homes is falling sharply.

The median price of a new home fell to $409,300 in October, down more than 17% from a peak of $496,800.

This dynamic is not the same in the existing home market...

Let's explore the difference.

1/ New construction sales come from homebuilders where the business is to build and sell homes.

Like any business, you can't hold too much inventory. When inventory piles up, you have to move units at discounted prices.

Existing home sales come from regular working people.

2/

An Update on Employment:

I adjusted my chart on the NSA path of continued claims to now use the insured unemployment rate.

The insured unemployment rate normalizes continued claims for the size of the labor force.

This was a valid critique from @Econ_Parker

(1/7) 2023 started the year with an insured unemployment rate below the average of prior non-recession years but after the SVB crisis, the 2023 rate started to poke above the average.

This implies a modest weakening of the labor market.

(2/7)

Fed policy is currently very restrictive as interest rates are above the trending level of real and nominal growth.

Let's take a look at where we are in terms of growth vs interest rates...

1/ After declining sharply in December 2022, real growth has stabilized in the mid-1% range.

The most complete measure of growth takes a composite of various business cycle indicators rather than quarterly annualized real GDP guesses.

2/

After slowing to a growth rate of 0.4% in December, aggregate growth in the US has been in a remarkably stable range for all of 2023.

1/3 Real income had the biggest jump since Q4, while employment growth has slowed.

Currently, real income and real consumption are above trend.

Real retail sales remain in contraction.

2/3

Bob is correct!

The economy maintained positive nominal growth while money supply was contracting because velocity increased.

However, I don't think you should expect the same situation to continue going forward.

Here's why...

1/

https://twitter.com/BobEUnlimited/status/1688533662340440066

We know from the work of Dr. Lacy Hunt that velocity is heavily influenced by the Loan-To-Deposit ratio.

There are other factors, but the LD ratio is a huge driver.

So saying velocity has been increasing is like saying the Loan-to-Deposit ratio went up.

2/

Is the housing bubble deflating?

The average new home is selling for 8.3x average disposable income.

This is down from a record of almost 10x!

1/5 But...

The average existing home is trading for 7x average disposable income, nearly at record highs and way above the long-term average.

2/5

Residential Construction 🏘️

Employment and output in the residential construction sector has cooled from a near-record 16% annualized growth rate to a mild contraction.

The hard or soft landing question will largely come down to where this index goes from here.

1/4 Activity in the residential construction sector exploded in 2020/2021 and flattened out at peak levels almost immediately after monetary tightening began.

2/4