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By New_Deal_democrat November 11, 2014 1:36 pm
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The case for a consumer slowdown

In 2007 on the eve of the Great Recession, UCLA Prof. Edward Leamer gave a speech at Jackson Hole entitled, Housing IS the Business Cycle.

The thrust of the speech was that, in almost every case since the end of World War 2, housing was the first segment of the economy to turn down - on average about 5 quarters before the onset of a recession - and the first to turn up as well.

Leamer also found that the second segment of the economy to turn down - about 6 months before a recession - was consumer purchases of durable goods - in short, cars.

Since we got an updated report through October on motor vehicle sales last week, and the GDP report on private residential investment mirrored what housing permits have been telling us all year, I thought I would take a look at Leamer's leading metrics.

Below is a graph showing that since 2009 that at least one of these two most important and long-lasting consumer purchases has not been improving briskly. First motor vehicle sales improved. As they began to plateau last year, housing stalled for some months but then slightly improved again:

I should note that motor vehicle sales typically have gone more or less sideways for long durations during economic expansions.  

What is different this year is that housing and car sales have been going generally sideways at the same time:

Car sales did improve in spring, but except for August, have not improved in the last 8 months. Housing probably made a trough in March and the trend seems to have improved since.

 

The above approach, focusing on the two most durable and important purchases made by consumers,  contrasts with the Conference Board's Index of Leading Indicators:

It is interesting that outside of monetary and credit conditions, neither of the two next largest contributions to the index's positivity this year are consumer measures, but rather are more business oriented:  jobless claims and the stock market.  

Other consumer measures also tell a more subdued story.  Household deleveraging appears to have ended:

Of a piece with this is the near-death of mortgage refinancing (from Mortgage News Daily):

It will be interesting to see if the kick to household disposable income from lower gas prices makes up for the inability to refinance debt at lower rates.

In any event, tomorrow October retail sales will be reported, and it will be interesting to see whether or not they go up, ex-gasoline.  October housing permits will be reported next week, and we may find then that gradually subsiding mortgage rates this year give us a new high.

In any event, housing and car sales are already forecasting stagnation (but not contraction) of the consumer economy through at least the first quarter of next year.

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