Monday, May 19, 2008

This Month’s Indicators


The Conference Board announced today ( that its Index of Leading Economic Indicators advanced slightly in April after rising somewhat in March. The index remains down for the past six months and full year.

The chart below reveals that the leading indicators have stalled, showing no gain for some time.

Leading Indicators

(Click on chart to enlarge)

Recessions shaded

Does the recent uptick mean that the worst is over? Have we rounded the corner? Do we see the light at the end of the tunnel?

Probably not. Consider housing starts: Construction on 692,000 single-family homes began in April, according to Friday’s Census Bureau release ( Starts have been declining for two years and that was the lowest level since January of 1991. That’s no cause for optimism.

But why focus on single-family home construction? Because that’s the eye of the storm. The asset-deflation in single-family homes has led the economy south by destroying household wealth and discouraging new construction. And new construction merely exacerbates the problem by maintaining the inventory of unsold homes. That forestalls the conclusion to the downward home-price spiral and prolongs the slump. If builders add to the supply of unsold homes while demand remains weak, home prices will continue falling. Why would they do that? Because the contractors building new homes are not the realtors who are trying to sell existing homes. The two segments of the market are working at cross purposes.

Last Thursday’s press release from the National Association of Home Builders ( revealed the industry’s gloom:

“The single-family housing market is still deteriorating…..’ said NAHB President Sandy Dunn…….”

Ms. Dunn’s unhappy prognosis was based upon the Builders’ Housing Market Index that has hovered between 18 and 20 for the past nine months. It’s important to know that the index was as high as 70 three years ago and that the index was as low as 20 only once before. In January 1991, when single-family home construction was momentarily at today’s lows, home-builder sentiment dipped briefly but bounced quickly back. Builders are in a prolonged funk today because they understand their uniquely pessimistic circumstances. This is the first post-WWII housing downturn instigated by a prolonged house-price deflation.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

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