I spoke with Hugh Moore of Guerite Advisors over the weekend. Hugh has sent this chart over, and I found it worth sharing (I’ll have some more info later this week on Housing).
Note that the NAHB Housing Index is a measure of Builder sentiment — it measures a combination of sales, traffic and new permits (NAHB site is down, I’ll post the exact components later).
What happens when we overlay the Housing Index against Real Personal Consumption? It turns out that, going back to 1985 anyway, it operates as a leading indicator:
Graphic courtesy of Guerite Advisors
I would like to see this going back further than 1985, but it certainly raises some interesting issues . . .
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UPDATE II: January 22, 2007 12:43pm
The range for the NAHB/HMI ran from a maximum of 78 in December 1998 down to a minimum of 20 in January 1991.
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UPDATE: January 22, 2007 11:47am
Here’s some more details from the NAHB survey, now that their site is back up:
"Derived from a monthly survey that NAHB has been conducting for 20
years, the NAHB/Wells Fargo Housing Market Index (HMI) gauges builder
perceptions of current single-family home sales and sales expectations
for the next six months as either “good,” “fair” or “poor.” The survey
also asks builders to rate traffic of prospective buyers as either
“high to very high,” “average” or “low to very low.” Scores for each
component are then used to calculate a seasonally adjusted index where
any number over 50 indicates that more builders view sales conditions
as good than poor.Two out of three component
indexes registered improvement in January. The index gauging current
single-family home sales and the index gauging traffic of prospective
buyers each gained three points, to 36 and 26 respectively, while the
index gauging sales expectations for the next six months remained
unchanged at 49.
Note that "50" is the line in the sand for good versus poor conditions; Current sales and prospective traffic improved slieghtly, but its still way below 50, meaning its still rather poor . . .
i hope you and your readers realize that there’s no “y” axis for the NAHB – or do you think the sentiment has been positive for the last 20 years? the author u quote is not an original thinker, google this relationship and u’ll find tons of studies going back for some time.
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BR: You are partially correct. There is a Y axis, its just not marked for the NAHB index.
Let me find out if I can get that data
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UPDATE II: January 22, 2007 12:43pm
The range for the NAHB/HMI ran from a maximum of 78 in December 1998 down to a minimum of 20 in January 1991.
There is no issues to raise here. It’s well-known and understood that the consumption is trending down and its plunge is overdue.
I am wondering if this is the best leading indicator I’ve ever seen.
>>> I am wondering if this is the best leading indicator I’ve ever seen.
Depending to what? Yes, it is the best leading indicator to consumption. But consumption by itself is only part of the puzzle. The consumption slump at the tail of real-state bust in 1994 somehow did not made it to recession.
If you believe that the current structure of economy may not sustain extra-low risk premiums during the declining consumption then you can make conclusions.
I think the problem is that we are not at the tail of real-estate slump this time. We are barely at the head. The tail of this beast (3-4 years from now) will be very spectacular.
Data prior to 1985 would be irellevant. Just say the NAHB is a leading indicator now and be done with it. What could be learned from older comparisons?
With respect to the economy at large, does it currently more closely resemble the conditions seen in 1994 ( no recession) or in 1990 (recession)? I suggest we compare fed funds rates, real interest rates, global growth and exports, cap ex., employment & income growth, etc. to see which set of conditions more closely resembles that which we are experiencing today. Obviously, one difference is that the housing index did not fall as fall or for as long of a period of time in 1994 as it did in 1990 or as it has in 2006.
The chart clearly indicates a correlation between the housing index and personal consumption. However personal consumption has been on an unsustainable growth track. Isn’t a drop off likely to be a good thing in the long run? (higher savings, lower balance of payment deficits, lower interest rates, etc.)
“Isn’t a drop off likely to be a good thing in the long run? (higher savings, lower balance of payment deficits, lower interest rates, etc.)”
….Lower corporate profits, lower real investment, lower overall asset prices…
“…Lower corporate profits, lower real investment, lower overall asset prices…”
Maybe so. But also please factor in global expansion, higher exports, lower interest costs and continued productivity gains.
A significant amount of housing construction and personal consumption expenditures are “buffered” from the economy since they comprise of imported goods or imported labor (primarily hispanic workers who repatriate much of their paychecks to families overseas).
With globalization, many small and mid-cap companies have become “multi-nationals”. If personal consumption declines, then I would expect the $ to fall and exports (and import substitution) to increase.
What IS different this time is the fact that we have a global expansion in place.
there’s a good discussion on the subject – and your chart – at http://www.contraryinvestor.com/mo.htm.
But word of caution to some of your readers:
1-correlation doesnt mean causation,
2-there’s been a recent disconnect in the UK between these variables (check bank of england study or
http://www.marketthoughts.com/z20060824.html) and,
3-not long ago some big houses had the chart of the lagged s&p w/ the HMI for the last 10 yrs w/ its incredible correlation (80%); and what happened if u looked further into the past?(http://www.bignose.org/blog/index.php?/archives/129-When-charts-go-bad.html).
Daniel – excellent articles! many thanks.
Thanks for the link.
While like our host I am cautious about consumption (which, be honest, is cautious about GDP), for now the data continue to improve. The Chicago Fed released its national activity index today. As I at least expected, the short term numbers are an improvement off previous levels, but not yet what you’d call more than mediocre. If you click through to the release (PDF), you’ll read about that indicator’s three-month average (currently at -0.2, up from -0.4), “A CFNAI-MA3 reading below zero is associated with below-trend economic growth; accordingly, the CFNAI-MA3 value of –0.19 for December suggests that growth in national economic activity was below its historical trend. With regard to inflation, a CFNAI-MA3 value below zero indicates little inflationary pressure over the coming year.”
Right now, that approximately accords with my expectations: there is approximately zero risk of inflationary pressures building or of the Fed raising, but the economy is not showing any signs of real weakness yet.
If residential housing prices start dropping instead of just flattening, though, I expect that to change in a hurry. The latest I’ve seen in the literature indicates that aside from mortgage withdrawal, the wealth effect for housing prices measures reasonably well for consumer spending.
Time, as always, will tell.
It shouldn’t be called “Sentiment” but more like “feelings” lol. It will be interesting if the Northeast “side” of it tanks from 39 to below 30 by next February. Historic arctic air along with a dying market will make those “feelings” turn sour quickly.
What will that describe in the trend then?
BR–Given the last press leases of several of the large builders, I’m not sure that I would trust their perceptions. They had to take big writedowns on land (that really seemed self evident to us hand-wringing bystanders) but at the same time declared that they were “surprised”. Personally, I would make no investment decision based on the perceptions of an entire industry that potentially is in the cyclone spin of a toilet flush.
what if the next set of GDP numers is a tad stronger ? the real deal is the liquidity that is sloshing around and nothing can stop inflation of asset prices right now. yes there is IMO going to be a pull back of prices mayne for 3 months but it will be a buying opp IMO because the world wide growth will run till at least 2008 (the olympics). at the very least as long as MZM and M2 growth continues … so will the World Wide CB’s hand out money hand over fist. Rates are going up by the end of the year that is my only prediction.
Personally, I would make no investment decision based on the perceptions of an entire industry that potentially is in the cyclone spin of a toilet flush.
Gold star to leisa for not only the metaphor of the day but a strong contender for the metaphor of the week
LOL!
Remember that great US Productivity Miracle and how its existence was Easy Al’s oft-repeated excuse to provide promiscuous credit growth?
Whoops:
US productivity growth lowest for a decade
http://www.msnbc.msn.com/id/16758679/
DavidB–thank you!
I was just reading an older interview with Nassim N. Taleb in the Sept 2000 issue of Stocks and Commodities Magazine. He makes considerable reference to the idea that people tend to assign significance to what is in reality random. It is an interesting interview.
Are you one of those traders who look at the markets as a metaphor for life?
Trading is about dealing with randomness in an effective way. You have to be a hyper realistic, no-nonsense type of person. This will have some irreversible effects on your intellectual makeup. You do not take what you see around you for granted, which may bother some people. You also start hunting for fools.
“We humans have a lot of mental biases in dealing with randomness. You experience those in your life and in your trading. There is a war going on in me between the gullible part of me with genetic biases in my understanding of probability and the part of me that is the obsessively skeptical trader. You do not need to correct the biases in your private life; to do so would make you antisocial. But not doing so as a trader would be deadly. So you need to separate the two.
We depend more and more on uncertainty. Increasingly, our daily lives are full of randomness as our environment is becoming more and more complex. You have to deal with information, probabilities, and decision-making under uncertainty”
The above is an excerpt cut from the following abstract:
http://www.traders.com/Documentation/FEEDbk_docs/Archive/092000/Abstracts_new/Interview/Interview.html
Are we paying to much attention to certain salient items? Are we having an almost ritualized response to certain information?
We seem to be commingling psychology with economics based on small samples.
m where consensus is so strong is a danger to our thinking since it is a self reflexive situation (thank you G. Soros!).
But lets say consensus here of an economic downturn is correct whether it is random or not.
Can someone present what he or she think is a definitive tell for any given market? The proverbial tipping point?
I will guarantee there is going to be an option out there that if we all invest in it at the right time we can make a fortune.
I also suspect that it is unlikely that any of us will be able to find it and have enough confidence in our decision (or so risk enamored) to pull the trigger in a large way so that we become as rich as Midas (or Gates). This is the nature of the situation. I can sometimes make a statement as if it is absolute fact when a lot of it is a hunch.
I live in Michigan USA. There has been a real economic recession here for over 2 years. While the rest of you are drinking champagne we are drinking generic cola. But it is a great place to observe human economic behavior under adverse conditions. Every time I go to Cosco or a circuit City someone seems to be buying a large screen TV or there are numerous folks staring at the displays. Gas goes down below two dollars a gallon and there are initially lines to buy the stuff. Business fail, people leave the state. Restaurants pop up, franchises advertise as investment/business opportunities. People seem to eat a lot of Pizza. Bookstores are popular; JC Penney’s opens new stores. Autoworkers are laid off or take buyouts and move to the South West where there is a lot of oil related work.
I like refiners. Just saw that lith ion batteries are going to be made for cars.
Would someone tell me in which sectors are margins improving?
Just saw a headline saying a genetic discovery might end the disease Lupus. No matter what the economy does Biotech motivated by Health Concerns looks like the hot area.
It all comes back to our physicality. We are meat and we want the meat to be fresh!
I want a list of what “tells” we think for investments you think we should use in the near future lets say a year.
Draw lt term trend lines in sectors that are trending and when they break put your finger on the trigger.
The above is intended to provoke.
I too enjoyed the toilet analogy, but below the equator the water spins in a different direction. Does that mean we should invest in the opposite direction too in that part of the world?
Thanks for all the interesting articles to read.
Alexd
Back to reality folks (the market). many of you have been and are short HB’s. What are you doing here? I have mentioned that there is very little analysis of the other side of the trade on this site. Do you put more out here….cover? trading is about supply and demand and it’s reaction to what is already in a stock. Maybe for those not short,this lift is a spot to short into. Looking for comments.
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BR We’ve been long the HB since September — its a crowded short