Leading Indicators Point to Stalling Economy as Housing Continues to Slow

Key Takeaways:

• The Conference Board Leading Economic Index® (LEI), a gauge of the economic outlook over the next three to six months, fell 0.8 percent in June to 117.1, the fourth consecutive month of decline. According to a Conference Board press release, "Consumer pessimism about future business conditions, moderating labor market conditions, falling stock prices, and weaker manufacturing new orders drove the LEI's decline in June."
• Existing home sales fell 5.4 percent in June to a seasonally adjusted annualized rate (SAAR) of 5.12 million, the lowest level in two years, according to the National Association of REALTORS®. Sales of single-family homes fell 4.8 percent to a SAAR of 4.57 million, while sales of condos/co-ops fell 9.8 percent to a SAAR of 550,000. The number of existing homes available for sale rose 2.4 percent year-over-year to 1.26 million. The months’ supply of existing homes rose four-tenths to 3.0, the highest reading since August 2020. Sales in the second quarter averaged 5.38 million annualized, down 11.2 percent from the first quarter.
• Housing starts fell 2.0 percent in June to a SAAR of 1.56 million, the fewest since October 2021, according to the Census Bureau. Single-family starts fell 8.1 percent to a SAAR of 982,000, while multifamily starts rose 10.3 percent to a SAAR of 577,000. Single-family permits declined 8.0 percent, while multifamily permits jumped 11.5 percent. For the second quarter, total housing starts averaged 1.65 million annualized, four percent below the first quarter.
• The National Association of Home Builders/Wells Fargo Housing Market Index fell 12 points in July to 55, the largest monthly decline since the COVID-19 related decline in April 2020, and the lowest level since May 2020. The indices for present sales, sales in the next six months, and traffic of prospective buyers all fell sharply.

Forecast Impact:

The fourth consecutive monthly decline in the Conference Board LEI supports our view of a stalling economy and our forecast of a recession beginning in the first quarter of 2023 as inflation and rising interest rates increasingly weigh on consumer sentiment and spending. Furthermore, the increase in initial unemployment claims to the highest reading in eight months suggests that the labor market is beginning to loosen. However, the labor market currently remains robust, and we continue to expect the Federal Reserve to hike the federal funds rate by another 75 basis points at its July 26-27 meeting following last week’s CPI report.

Housing data this week continued to show that activity is slowing. Existing home sales fell in June as we expected, though the decline was modestly less than our Q2 expectation, which will likely lead to a small upward revision to our Q3 home sales forecast. However, we continue to expect sales to decline into 2023 as affordability remains stretched. Worsening affordability will also drag on single-family construction, as evidenced by the declines in housing starts in June. Additionally, many existing homeowners with current mortgages that have rates lower than today’s market rate likely will be dissuaded from moving up to a new home. Homebuilder sentiment continues to fall as these dynamics begin weighing on the demand for new construction. While we expect multifamily construction to soften as the year progresses, we believe this segment of housing will remain comparatively resilient as demand remains strong because rents are attractive relative to principal and interest payments on a mortgage at current rates.

Ricky Goyette
Economic and Strategic Research Group
July 22, 2022

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