The Case Against Recession Is Building
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Some Constructive Criticism of the Recessionista Thesis

“The house don’t fall when the bones are good,” we are instructed by that sage of Arlington, Texas, and Nashville, Tennessee, Marin Morris.

The bones of the U.S. economy are looking good as we hurtle toward the warming months, which means the house of the U.S. economy is not about to fall.

The U.S. Census Bureau, which is the division of the Commerce Department that is—for obscure reasons—assigned the duty of tracking new home sales and construction, said that construction spending rose 1.2 percent in April compared with March to a seasonally adjusted annual rate of $1.908 trillion. During the first four months of 2023, construction spending is up 6.1 percent compared with the same period last year.

Residential construction rose 0.5 percent to a seasonally adjusted annual rate of $845.4 billion. A 0.8 percent drop in single-family construction spending was partly offset by the 0.6 percent gain in multifamily construction. Rising rates weigh on residential construction, but the “lock in” effect of existing owners with low cost mortgages is driving activity into new construction. Year-to-date, homebuilder stocks are beating the S&P 500. Housing starts have been up in two of the last three months.

This was far better than the forecasts summoned forth in the crystal balls of Wall Street’s wizards. They had projected a paltry 0.2 percent gain and an outright decline in residential construction spending.

It’s hard to have a recession when construction spending is rising. And this wasn’t just a one-month bump. Year-to-date, overall construction spending is up 6.1 percent.

We’re Building Factories, Hotels, and Roads

Nonresidential construction was expected to slow from 0.7 percent in March, continuing the trend in place since January. Instead, it jumped 1.9 percent, with private sector nonresidential construction jumping 2.4 percent.

Percentage-wise, the biggest gain was in manufacturing construction, which rose 8.7 percent compared with the prior month, an impressive feat for a sector everyone agrees is in a slump. Year-to-date, construction spending on manufacturing plants is up 83.8 percent. This is a sign that manufacturers are gearing up for future productions and would appear to be a vote of confidence by manufacturers that an economic downturn will be short-lived.

Manufacturing is the largest category of private sector nonresidential construction spending, coming in at a $189 billion annual rate in April. That’s around 29 percent of total nonresidential construction in the United States. So, when it is expanding, it has broader macroeconomic effects that drive gains in employment, wages, and the markets for materials and equipment.

This is potentially related to the construction of semiconductor plants incentivized by the CHIPS Act, as well as work on transforming traditional auto manufacturing facilities into electric vehicle factories.

President Joe Biden visits a Wolfspeed semiconductor manufacturing facility in Durham, North Carolina on March 28, 2023. (Peter Zay/Anadolu Agency via Getty Images)

Even the much beat-up category of office construction saw a bump in April, rising 0.3 percent to an annual rate of $84 billion. Spending on commercial sector projects rose 0.7 percent to a $125 billion annual rate, making it the second largest category of nonresidential commercial spending.

Government spending also boosted the headline number. Public construction spending rose 1.1 percent, entirely because of rising nonresidential spending. Spending on highways and streets, the biggest category of public spending, jumped 1.3 percent to $124.7 billion. Year-to-date, highway and construction spending is up 19.9 percent, and total public construction spending is up 15.3 percent.

It’s no wonder that construction is boosting the jobs market. The private sector added 64,000 construction jobs in May, according to ADP’s employment report. That accounted for a little more than one-fifth of all the May gains in the ADP report.

We’re Improving Ourselves

The lack of homes for sale was one of the unexpected results of years of low interest rates being followed by last year’s sudden climb. People with very low mortgages do not want to sell their home either to upsize or downsize because that would mean accepting a new mortgage with a much higher rate. As noted above, that seems to be driving new home and apartment construction to feed the appetite for home-buying.

The Associated Press

Construction workers build new homes in Philadelphia, Pennsylvania. (AP Photo/Matt Rourke)

Another unexpected result appears to be increased spending on home improvement. This rose 1.7 percent in May after rising one percent in April. It now rivals single-family home construction in size, with both making up about 40 percent of total private residential construction spending. People who do not want to move because of high mortgage rates are spending a lot to improve their current homes.

None of this means we’ll avoid a recession. We still think it is likely that inflation will prove sticky enough that the Fed will raise interest rates high enough to throw the economy into a recession. In effect, the Fed will engineer a recession to tamp down inflation. It does mean, however, that the recession is not imminently upon us.

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