US economic growth accelerated last month, according to the November update of the Chicago Fed National Activity Index. But while the broad trend is looking stronger these days, housing remains wobbly. Existing home sales fell a hefty 6.1% in November – the biggest monthly decline in over four years. The slide follows last week's news of November's sluggish growth in housing starts and a decline in newly issue building permits – a sign that housing construction may be headed lower in the months ahead. Considering the residential real estate's influence in macro matters, it's reasonable to wonder if the soft data of late pose a threat for an economy that's otherwise expanding at a faster pace.
It's widely recognized that housing's a key factor for the nation's economic activity. According to Ed Leamer's study of the sector's role through the decades, “Housing IS The Business Cycle.” Writing in 2007, he advised that “of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables.”
That's an ominous track record, especially now, in the wake of recent numbers for the housing sector. Newly issued building permits, for instance, were flat on a year-over-year basis through last month. More troubling: the annual pace of permits has been winding lower for several years. Taken at face value, this leading indicator for the housing sector is flashing a warning signal.
But despite Leamer's research, it's still prudent to think of housing as one of several factors that, in the aggregate, determine the path of economic activity. As I discuss in my book, Nowcasting The Business Cycle
