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

A visualization of the US debt situation:

Where does all the debt sit?

Where are the problem areas?

Let's break down the sectors with the largest and fastest-growing debt burdens 👇.

1/16 At the top of the stack, we have total debt, which includes all public and private sources.

Total debt is 351% of GDP.

In 2007, total debt averaged 351% of GDP so there's been no aggregate deleveraging at all.

2/16

Existing home inventory: near record low.

New home inventory: near record high.

What's the real story?

Let's explore the true US housing inventory situation and what it means for the construction sector and the broader economy going forward 👇

1/x In order to get the most accurate reading on the US housing market inventory situation, we need to consider both supply and demand.

Supply, in this case, is the level of inventory for sale, and demand is the current pace of sales volume.

2/x

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