Friday, October 18, 2019

An Increasingly Divergent US Economy

Lots of people have been huffing and puffing about whether or not the US economy will go into a recession in the near future, with Menzie Chinn and Jim Hamilton at Econbrowser saying it is now about 50-50 whether or not the US economy will go into recession by the end of 2020.   I do not have a horse in that race, but I am struck that a new odd phenomenon has recently appeared in the US economy, a split between sectors regarding their performance that recently seems to be increasing.

The sectors are manufacturing, which has been declining now for several months, the harbinger of recession, and housing starts, which has more recently been showing an acceleration of growth that may well hold off any recession if it continues to accelerate.  It is unclear which will win out.

The manufacturing decline has been widely tied to the trade wars, which would appear to be at least partly responsible.  It is also the sector that through trade may be experiencing the pressures of the slowing of global growth.

However, ironically the recent increase in housing starts may be a result of the fears of recession that have been mounting recently, along with the Repo Ruckus that happened last month.  The upshot of these has been a change in Fed policy towards stimulus, with target interest rates being gradually moved down while the Fed has also stopped reducing balances and has been actively intervening in the repo markets to keep them stabilized.  In any case, housing is the most interest-rate sensitive sector of the economy, so it may be that this shift in monetary policy has triggered the uptick in housing starts that is now moving to offset the decline clearly apparent in manufacturing. 

This is getting interesting, and I am not going to forecast how it will come out.

Barkley Rosser


Showonenewreply said...

There were 3 crashes up to 1929; oil in 23, real estate in 27, stocks & bonds in 29. Then the fatal blow was the banking failure in 32. Housing hid other slowdowns in 2005-06 before it all took a shit in 2008. Conditions are way past ripe for the biggest crash in the history of capitalism. said...

I have been slightly off here. It is not housing starts that are up, but single housing permits. But the basic story still holds: prospects for the near future are for manufacturing to decline further while housing construction is likely to rise.

Anonymous said...

Housing permits and starts both turned down in September. said...

Single housing permits were up. They are three quarters of the market. Multiple unit housing permits are more volatile than single housing ones.

Brenda Rosser said...

Numerous reports about economies around the world indicate that the world is likely in an economic recession. Things like one third of Indian textile workers losing their jobs due to a drop in exports and a drop in domestic demand. In April “a sharp and accelerated decrease in new orders" for manufactured output reported in Germany. Much weaker economic growth in China with the country reporting that its economic growth cooled to its slowest in 28 years in 2018 (That's a big deal when China contributed about one third of economic growth globally in the last decade). A trucking freight index for America "says year-over-year trucking volumes have slipped for eight consecutive months" (July 2019). There was a 43% decline in US shale oil production in one year (2018-2019). etc