Broker Check

Cyclical Industries Show Signs of Weakness

November 30, 2018

The home construction industry has been reeling recently as a combination of factors has caused builders to become more cautious. The National Association of Home Builders added the most recent bad news when they announced that home-builder confidence fell sharply in November. The decline in confidence is partly due to increasing interest rates, a slowing of home price appreciation, and concerns about affordability.

The decline in home-builder confidence can be observed in the housing permits data. New residential construction permits have declined by nearly 10% since their peak in early 2018, a reduction of 136,000 housing permits per month, in the past 6 months.

While home construction is just one industry, it often has an outsized impact on economic growth. New home construction often feeds other forms of consumer spending and financial services. New home sales are correlated with an increase in spending on appliances, furniture, and a litany of consumer services. In addition, financial services such as real estate   brokerage   services,   title   and   homeowner’s insurance, as well as mortgage financing help drive economic growth. Therefore, the construction of a new home can have a much larger economic impact than just the sales prices.

Meanwhile, as housing shows some signs of cooling, the other major cyclical industry, automobile manufacturing, is also showing signs that it may have peaked this cycle.

The value of automobile shipments has declined over 22% from its peak in 2016. Therefore, it appears that auto industry sales may have peaked for this economic cycle making it unlikely that the auto industry will make up for the recent decline in housing activity.

Naturally, a decline in the housing and automobile industries would not automatically lead to a recession in the US. Increasing US consumer spending has shifted to services making consumer goods and manufacturing less of a bellwether for the economy. However, the recent decline in these historically key industries should not be ignored as they may be an indication of consumer trends that could spread to other areas of the economy.