Evening Brief – 01.24.24
Rethink
Many economists who anticipated a recession this year are reconsidering their predictions. Similarly, efforts to review recession models that were previously deemed dependable may need to be modified.
There are numerous reasons for the about-face, ranging from determining why the generally reliable inverted-yield-curve warning failed to the false recession signals from leading indicators, especially the Leading Economic Index. Of course, these and other widely followed recession indicators may still be prove correct, but for the time being, the US economic expansion continues.
An interesting hypothesis for why many recession forecasts failed last year is the strength in residential construction payrolls.
“I encourage everyone… go back” and look at “the last three cycles” and “look at residential construction workers,” said Logan Mohtashami, lead analyst for HousingWire. “If you’re trying to find the missing link to your recession model, traditionally speaking residential construction workers are falling down” during the start of recessionary conditions. But this time has been different.
A decline in employment in the housing construction sector has been a reliable recession forecast, but it has been noticeably absent recently. This is somewhat unexpected, given the decline in housing starts.
Nonetheless, the debate about the probability that a recession is near will not end. It will continue to revolve around ever-changing assessments of key economic indicators, such as GDP growth, employment trends, inflation rates, and financial market conditions.
Resilient housing workers may have contributed to avoiding a recession last year, but pandemic-related variables likely changed the rules on how the business cycle plays out.
For the time being, the housing-construction-worker component, among other indicators, appears to support the soft-landing expectations. Homebuilder sentiment improved substantially in January, indicating that housing development may become a net positive for the economy this year after suffering a major setback in 2023.