New residential building permits is one of the best leading indicators of recessions.

Here's how you can easily make it even better.

(And what it's saying now)...

1/ Building permits are a great leading indicator because they are an early step in the residential construction process.

We know that residential construction is a critical part of the business cycle, so getting an early lead on this is important.

2/

Tariffs on, tariffs off.

No one knows the next policy move.

But here's the economic reality of how tariffs impact the economy and why they should be used carefully...🧵

1/ The arguments or the stated goals of tariff policy are clear – protecting current American jobs from unfair foreign competition, reshoring manufacturing plants and high-paying jobs, and closing large trade deficits.

2/

The labor market is holding together on the surface, but concerning details appear under the hood.

No quitting and no hiring, but also no firing yet.

Here's the real story behind the US labor market.

1/ To start, the health and vibrance of the labor market comes from the goods economy of construction and manufacturing.

So this is where we focus.

If you need a primer on why, check this out:

2/

https://x.com/EPBResearch/status/1866564552055566727

Real retail sales are now lower than the pre-pandemic trend line.

Real sales volume has moved sideways for over two years!

Is the consumer in trouble?

1/ Retail sales are reported in nominal dollars, or including inflation.

Historically, retail sales increased at a 4.2% annualized pace.

About 2% of that was price, and 2% was unit growth.

2/

Q1 GDP growth is estimated at -2.4% per the Atlanta Fed.

Is a recession hitting now?

Here's what's actually going on 👇

1/ First, the Atlanta Fed GDPNow model is a rolling estimate that gets better with more data.

So at the start of a quarter, the model is mostly estimates and the GDP output is not accurate.

As the estimated data gets replaced with real numbers, the model is more accurate.

2/

Durable goods are the most high-powered, high-velocity area of personal spending.

This includes:

- Motor vehicles & parts
- Home Furnishings
- Recreational Vehicles

We still haven't fully reversed the surge of durables spending after the pandemic.

Here's why it matters.

1/ The economy has four primary categories:

- Private consumption
- Private investment
- Net exports
- Government spending

2/

The heavy truck sector is at a critical point.

Right now, truck sales are stable, but truck production is tumbling.

Here’s the story in the truck sector, why you should follow it, and why it matters.

1/ One of the most important economic indicators is vehicle sales.

The economy runs on housing and vehicles because both have a major consumption and production cycle.

These are also large, financed purchases, meaning they are highly influenced by monetary policy.

2/

New home sales are one of the best leading indicators of the broader economy.

Right now, new home sales are at a critical juncture.

Here’s what’s happening and why it matters for the rest of the economy.

1/ New home sales tend to peak and roll over before the broader economy enters a downturn.

This happened in 2005 before the housing crisis.

2/

Will AI really replace all the jobs?

If AI is truly transformative, we should see an explosion in worker productivity.

Is this happening? Has this ever happened before?

Let's see...

1/ The best metric to look at is real GDP per worker.

This is different from real GDP per capita, which includes people who don’t work.

Real GDP per worker measures how much output the average worker can produce.

2/

The Fed hiked rates faster than ever, but the economy hasn't responded like normal.

Is something broken? Not quite.

The answer (like usual) lies in housing.

Here’s what's going on and why it matters...

1/ Leading indicators, like building permits, show where growth and employment are headed.

They're not magic—they’re mechanical.

You need a permit to start construction.

2/

Conceptually, the quits rate is a leading indicator of labor market conditions.

1/ A high quits rate means employees are confident quitting because they believe finding a new, better-paying job will be easy.

2/

Stock prices used to be a good leading indicator.

Not anymore.

A Thread. Prior to the 1990s, stock prices would decline before drops in earnings.

At times, stock prices would anticipate a decline in earnings that would not materialize.

But prices would generally lead earnings which slightly led the economy.

New housing inventory is at the highest level since 2008.

But that is only one piece of the puzzle.

Here's the full story. The single-family housing market is made up of new construction homes and existing homes.

Most people interact with the existing market because it is much larger and because not all regions of the country have a lot of construction.

2/11

I analyzed the top 10 sectors of the labor market.

These are the two most important.

Thread.

1/ The labor market is the most important component of the economy since job losses are a required part of the recessionary process.

2/

The residential construction sector still has some backlogs, but we estimate that things will return to a normal state in 2-3 months.

1/6 Residential construction is essential to the US economy, significantly influencing GDP, inflation, employment, and Fed policy.

Major backlogs accumulated in 2021 & 2022 allowed residential employment to avoid contraction despite a major shift in monetary policy.

2/6

Several labor data points were released ahead of Friday's Employment Situation Report.

Total job openings ticked higher in August. The downtrend in job openings remains firm - while still above 2019 levels.

The quits rate declined, a negative for future wage growth.

1/6 In the September ISM Manufacturing report, the employment component fell to 43.9.

The percentage of respondents reporting higher employment fell to 8, the lowest level since April 2009 (ex. COVID).

2/6

Real growth, measured by the big-4 coincident indicators, has been trending sideways for two years.

Stock prices have trended higher nominally, but priced in gold have trended sideways, mirroring the trend in real growth. Small cap stocks have underperformed the trend in real growth, continuing in a downtrend since the 2021 peak.

Initial jobless claims remain extremely tame on a non-seasonally adjusted basis.

The 2024 path is tracking almost exactly along the average of 2023, 2019, 2018, and 2017.

1/4 The 52-week average of jobless claims edged higher this week and is higher than the cycle low-point in February 2023 but has trended down most of 2024.

The insured unemployment rate, however, while low, continues to edge higher slowly.

2/4

How Far Behind The Curve Is The Federal Reserve?

Plotting the change in Federal Reserve interest rate policy before and after a trigger of the Sahm Rule.

Thread.

1/9 The Sahm rule was triggered in the July Employment Situation Report.

Historically, the Sahm rule has been a slightly lagging indicator, meaning the trigger dates occur after a recession has already started.

2/9

Q2 GDP was boosted by equipment investment, specifically transportation equipment. We've previously discussed how important these cyclical sectors are in driving the ebbs and flows of the overall Business Cycle.

The "Duncan Leading Index" was created from the idea that changes in the economy stem from a few sectors.

The pandemic roiled many of these sectors, and we can still see the impact.

Let's check on the momentum of these sectors and what it says about the economy today.

1/17 Generally speaking, the economy has four primary categories: private consumption, private investment, net exports, and government spending.

2/17