WMA Headlines Dec/Feb 2018

July 12th, 2021 by Nathan Hobbs

Reading Mixed Signals

2019: A Year for Caution and Optimism

By Dennis Berry

Having given some thought on where our industry is headed in 2019, it’s rather comforting to know that the number of incorrect forecasts given over time by “economists” is roughly equal to the number of economists providing forecasts. With that in mind, here are some data points and a few thoughts to go with them.

As of October 2018, the U.S. economy marked 112 months of continuous expansion. That’s the second longest span in U.S. history. If the economy maintains growth through this August, that would beat the current record.

As I write this, however, we have just experienced a pullback in the stock market that has wiped out all of 2018’s gains. That could be a sign that we’ve hit a wall, and the economy is headed toward a mild recession. However, given the overall strength in other attributes of the economy, it’s perhaps just as likely that the current pullback is a restorative correction to an overheated market.

For those of us whose livelihoods are tied to the housing industry, the question isn’t so much whether or not the overall economy will experience a period of contraction this year, but, rather, will we see a continued pull-back in housing starts and resales?

So where are the economy and housing markets headed in 2019? While there are many different methodologies used to predict their future states for a given period (in this case 2019), one straightforward method includes simply observing several known, core dynamic attributes of the economy, while attempting to discern whether or not they might be signaling a recession. I could list many, but here are three key indicators:

Accelerating Inflation: This would signal concern. As of October, the year over year rate was 2.7 percent, which is above the Federal Reserve’s target of 2 percent. However, the prior six months registered at 1.6 percent and expectations are for that rate to hover near 2 percent going forward.

Rising Unemployment Claims: This, too, would add to the likelihood that we’re at a danger point. But currently, outside of weather-impacted regions, those claims are near a 49-year low.

The Federal Reserve’s Index for Leading Economic Indicators (LEI): Every recession since 1970 was preceded by a downturn in LEI. And while recent softness in housing data has weighed somewhat on this index, seven of 10 components remained in positive territory as of September of last year. That’s not to say that there aren’t some caution flags flying these days, at least for the housing industry. Here are a few of those signals:

• After seven years of advances in housing starts, this year reverses that trend.
• Housing prices have risen an aver-age of 5 percent over the last five years and in many markets prices have exceeded peak levels from 2006 (which could indicate overheating).
• There is a significant lack of inventory among both new and existing homes for sale. This is especially true in the entry-level segment of the market (which creates excessive upward pressure on the prices of what would otherwise be affordable resale homes for first-time buyers).

All combined, what do these things mean?

I’m going to leave the actual predictions to others, so they can bear the shame of being wrong. What I will say is: No one should write off 2019, but we should be vigilant in controlling costs and having a plan in place that deals with what will likely be a brief pause heading into spring and summer, followed by a resumption in growth later in the year and into 2020.

In the meantime, the best news might be that we don’t have an over-heated and overbuilt housing market on our hands that even remotely resembles 2005-06.

Dennis Berry is senior vice president of NHC sales and CPM for The Empire Company and president of World Millwork Alliance.

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