A Construction Recession?
The Observatory
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Let’s begin. We have documented the ongoing contraction in the industrial economy for more than a year now. While those dynamics remain persistent, we have begun to see weakness developing in another cyclical sector: real estate. In today’s note, we take stock of the degree and pervasiveness of these pressures, with a particular focus on housing. Our observations are as follows:
The latest data continue to point to a weakening of construction activity, both residential and non-residential.
Our latest estimates point to an ongoing profit squeeze in construction profits. Homebuilder equities have begun to reflect these dynamics.
These conditions are in their nascent stages and may well reverse. As such, they are unlikely to facilitate a recessionary spiral in the economy or a significant bear market at the index level.
While these dynamics may not be recessionary, they create further pressure for mispriced earnings at the index level and relative value opportunities at the sector level. Our Alpha Strategies are currently short real estate equities versus a basket of sectors.
Let’s dive into the data driving this assessment. We begin with the big picture, showcasing our monthly estimates for nominal construction activity relative to the official numbers. As we can see, our estimates are generally good measures of ongoing construction in GDP:
As we can see above, our estimates of nominal activity have begun to slow.