The index of U.S. leading economic indicators fell 0.3% last month, breaking a modest string of upticks over the past 10 months. While the labor market and manufacturing showed weakness in April, longer-term it is the absence of a recovery in the housing market that is most weighing down the economy, Conference Board economist Ken Goldstein said in an interview with AdvisorOne on Friday.
The four factors most responsible for dragging down economic performance last month was a rise in new jobless claims; a decline in average weekly hours; slower delivery of manufacturing supplies; and a decline in building permits for new private housing units.
These indicators tend to fluctuate month over month, Goldstein (right) said, noting that consumer expectations — the worst performer in March — was the second most positive indicator in April (after the interest-rate spread between 10-year Treasuries and the federal funds target rate). Over the duration of the economic recovery, “we’ve gotten some hot and cold messages,” Goldstein said, regarding consumer market expectations, labor market conditions and manufacturing. “The one factor that’s been [consistently] more cold than hot has been the housing market.”
On May 17 the Commerce Department reported that construction of new homes and apartments fell 10.6% in April to an annualized rate of 523,000, down nearly 24% from the same time last year.
“Construction is bumping along the bottom,” Goldstein says. “The reason why home sales are not prompting more building activity is because you have so many foreclosures out there.
“That supply has been dragging on construction for almost a full year now. There’s no let-up right now, and probably not for the next few months.”
The building permits indicator is a signal of future construction. Pre-recession, new home construction amounted to some 2 million homes a year. “We got down to a quarter of that — for the last few months we’ve been at 500,000 to 600,000 at an annual rate. That’s not bad enough that it’s breaking a new down range, but not good enough to break out on the good side,” says Goldstein.
The Conference Board economist noted the positive turn in the job market means there are more paychecks out there that could be applied to mortgages. “Under normal conditions we’d see an upswing in housing,” he says. But the foreclosure-saturated market continues to dampen new construction and weigh down prices.
“Housing is the last leg over the fence as far as the economy is concerned,” he said.