Money Management: Economic indicators for the savvy investor

The U.S. economy goes through cycles of growth and recessions. Once growth sustains a consistent pattern the Fed often intervenes by raising rates to thwart off potential inflation threats above 2 percent. This restrictive policy ultimately curbs growth in large purchases, including autos and housing. The consumer making these purchases realizes the additional cost of ownership through higher payments and hence may defer a decision until circumstances are more palatable.

The housing market historically performs with ebb and flows. The ancillary industries feeding off the housing industry will also be adversely affected when a downturn exists in housing construction. Commodities like lumber, copper and steel will see demand languish and prices drop. Retail stores that satisfy this industry like Home Depot, appliance stores, carpeting and floor providers, heating and air conditioning manufactures and window installers will ultimately contain their capital expansion and possibly reduce employees to bring a balance to their aforementioned sectors.

Supply and demand in real estate will be a large determinate on prices. We have experienced a sharp increase in prices on an annual basis where the national median price of a homes listed is $276,000 — up 7.7 percent over a one-year period. The average selling price is $225,900 according to Zillow. This price escalation potentially diminishes the opportunity for new home buyers to enter the market and elevates the apartment rental sector. Multifamily home construction has been the rosy spot for the industry because demand remains strong; however, because of the shortage in this sector, rents have also risen to reflect demand which in turn will compete with a mortgage payment. The banking industry has been more restrictive in approving home purchases often requiring a larger down payment or mortgage insurance to diminish the risk and potential debacle we suffered 10 years ago.

Since 1960 the housing market can be a forecaster for a pending economic slowdown. When housing starts drop by 25 percent from their high, this has been a precursor to a recession. In 2005 the United States was averaging a 1,716,000 pace of single family home construction annually; by 2007 we were averaging 1,046,000 per year a 39 percent drop and a recession ensued. Another example was in January 1990, when new privately owned housing units starts was running at a 1,551,000 annual clip — by December 1990 it fell to a 969,000 pace, a 37 percent decline. We went through an economic slowdown in 1991.

The recent direction in single family housing starts has declined by 5.8 percent since January 2018 to November 2018, according to the U.S. Census Bureau. This gives us pause but not an alarm going forward.

By keeping this indicator on your radar, it could potentially provide one additional piece of the economic puzzle for your future.

Mitchell Thomas is an international equity analyst/portfolio mgr./head trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees in Pittsford, New York.