In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi examine declining recession risk, the increasing likelihood of an economic ‘soft landing,’ and the budding housing market recovery.

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Listen to the REconomy Podcast™ Episode 82:

“We expect existing-home sales to pick up in the coming months as mortgage rates moderate. And we know that the new-home market has picked up as well, so it does seem right now that the worst is behind us and that the housing market has already had its recession and is now heading into recovery mode.” – Odeta Kushi, deputy chief economist at First American

Transcript:

Odeta Kushi - Hello, and welcome to episode 82 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey Mark. In today's episode, we're going to discuss an aspect of the economy that economists have generally not done a great job of predicting.

Mark Fleming - Hi, Odeta. Oh, I know exactly what we're talking about -- recessions.

Odeta Kushi - How did you guess?

Mark Fleming - Well, haven't you heard the joke? Economists have predicted nine of the last five recessions.

Odeta Kushi - Yeah. Okay. Now that you mentioned it, I may have heard that joke once or twice in my career. Well, you know, business cycles exist, so we're pretty confident that a recession will occur at some point. But we're not always sure when it will happen, or how severe it will be. For example, prior to the pandemic recession, we were in the longest economic expansion on record at 128 months. And there was a lot of chatter at the time about recession, even though the economy was humming along.

Mark Fleming - So true. And I don't think any economist predicted what would end that long expansion, a global pandemic.

Odeta Kushi - Yeah, well I know I sure didn't see it coming. But that really begs the question, how do we know when we're in a recession? And what does this all mean for the housing sector?

Mark Fleming - So let's see if we can make an interesting episode out of a gloomy topic. 

Odeta Kushi - Financial gloom into podcast boom. Let's do it. Well, let's start with a not so simple question. Can you please define recession?

Mark Fleming - This time, I have an easy out for the econ-splaining, because we have a whole podcast episode dedicated to this, please refer back to Episode 44 for a deeper dive into what we define as a recession. But the short version is that a committee, known as the N.B.E.R.B.C.D.C., or business cycle dating committee, determines recession start and end dates. 

Odeta Kushi - Ah, yes, the BCDC our very own economic maestros determining whether our economy is on a highway to hell or more a stairway to fiscal heaven.

Mark Fleming - Liking the '80s music references today. I'm impressed. I need more coffee. 

Odeta Kushi - Yes. 

Mark Fleming - Now this BCDC looks at a wide range of different indicators to determine whether an economy is, or was, in a recession. They look at measures ranging from real personal income less transfers, that's your Social Security payments and welfare payments, non-farm payroll employment, employment as measured by the household survey -- we'll explain the difference in a minute -- real personal consumption expenditures -- how much we spend -- wholesale and retail sales adjusted for price changes, and industrial production. Their definition emphasizes that a recession, "involves a significant decline in economic activity that is spread across the economy and lasts more than a few months." And they highlight that they look at three criteria, depth, diffusion, and duration. 

Odeta Kushi - Well, that makes a lot of sense, because going back to the pandemic recession, it was very short. So perhaps it wouldn't qualify as a recession from a duration standpoint, but it was very deep and widely diffused. So that certainly does qualify it as a recession. But the takeaway here is that defining a recession is not as simple as consecutive declines in the GDP, which is maybe what you've heard before. Though, certainly, that's one important measure to look at. But since you just listed six specific indicators that the BCDC looks at, how is our recession risk looking, according to those measures?

Mark Fleming - As they also affectionately refer to themselves. Luckily, our favorite website, the St. Louis Federal Reserve economic data, which we affectionately refer to as Fred. 

Odeta Kushi - Exactly, if you can't see me right now, by the way, but I'm wearing my Fred t shirt. I'm a big fan. 

Mark Fleming - Yes, and if you love economic data, like clearly Odeta does, then Fred is it and it's free. So there is such a thing as a free Fred lunch.

Odeta Kushi - Bad econ joke number two, if you're keeping count.

Mark Fleming - I'll see if I can get that hat trick in this episode. But we digress. Fred has a very convenient dashboard where you can monitor the BCDC's favorite measures for tracking recession. Just look up data considered for NBER turning points on Fred, and you can follow along with us.

Odeta Kushi - We've also linked to it in the script of this podcast. 

Mark Fleming - Better idea. That's right. So let's start from the top of the dashboard. If that is the monthly change in total non-farm employment has been positive since the start of -- get this -- 2021 through our latest available December 2023 data, so a solid two years. 

Odeta Kushi - That's the payroll survey. Now what about the employment level as measured by the household survey?

Mark Fleming - Wait, wait, we have two different ways to measure employment growth. We need to explain the difference. Or I should say, you need to explain it? 

Odeta Kushi - Yeah, I guess it's my turn, you got the recession, and now I get this one. Although, maybe it's a little bit longer than an explanation. Yes. So the payroll survey estimates the nation's employment based on responses from a sample of business establishments, while the household survey estimates the nation's employment based on responses from interviews with households, so it's businesses versus households. And there's other differences as well, like the employment estimates from the payroll survey are a count of jobs, while the household survey provides an estimate of the number of people employed. So, if a person changes jobs, and is on the payroll of two employers during the same reference period, both jobs would be counted in the payroll survey estimates. And then, according to the Bureau of Labor Statistics, workers who are paid off the books are not reported in the payroll survey, whereas the household survey could possibly include some of these workers. So you get the point, there's a bit of a divergence between the two in terms of methodology. You know, they oftentimes align, but sometimes they dont.

Mark Fleming - One captures the gig economy and the other maybe not. 

Odeta Kushi - That's right. 

Mark Fleming - And indeed, in December, the employment level decreased, according to the household survey. The three-month average was also negative in December, but prior to December, it has been positive. So one month.

Odeta Kushi - That's right. Now moving along to the Industrial Production Index, which in December was up from a year ago. Similarly, with the real manufacturing and trade industry sales number, and real personal income, excluding transfer seats, and real PCE, so all positive.

Mark Fleming - And real GDP. 

Odeta Kushi - That's right. So most of the BCDC's preferred metrics are pointing higher. So no recession right now, does that seem to align with consensus?

Mark Fleming - Ah, consensus. I'm so glad you asked, Odeta. The Wall Street Journal has an economic forecasting survey that's been around for nearly 40 years. The economists in the survey are a panel that includes more than 70 academic, business and financial economists. 

Odeta Kushi - Important disclosure - neither of us are on the panel, but Wall Street Journal, if you're listening...

Mark Fleming - I'm still waiting for that invitation. One of the questions that they ask about in the survey is recession risk over the next 12 months. They report on this data quarterly. And, luckily for us, the January 2024 report was just released.

Odeta Kushi - Okay, I'm on the edge of my seat here. 

Mark Fleming - Yes, but the exact question posed to the panel is, what is the probability, in percentage terms, lest we have a different way of saying it, that at any time in the coming 12 months, very specifically, including today, the U.S. economy will be in recession?

Odeta Kushi - And the average probability was?

Mark Fleming - But, wait, first, some context. 

Odeta Kushi - Okay. 

Mark Fleming - Prior to the pandemic recession of February 2020, the probability was 26%. Pretty low. 

Odeta Kushi - Pretty low. 

Mark Fleming - It skyrocketed to 96% in April 2020. But I have to say, that's a little obvious, if you recall what was happening in April of 2020.

Odeta Kushi - Yeah, like, who is the 4% hold out there? 

Mark Fleming - Right. Exactly. It came back down to 24% by the end of 2020, as the economy rushed back and reopened. Peaked once again -- this is the recession probability -- peaked once again at 63% at the end of 2022. And, in October of last year, was still 48%. And in the latest report, it was...

Odeta Kushi - Will you just tell us?

Mark Fleming - I feel like I've got to do the drumroll. 39%. 

Odeta Kushi - Alright, that's not too bad, higher than it was, you know, pre-pandemic, but lower than it's been recently. So economists and experts are signaling that recession risk has come down, as the U.S. economy continues to demonstrate resiliency, and that's really thanks to the U.S. consumer.

Mark Fleming - I guess so. I mean, I assume we interpret the survey as when it's above 50, more than half think it will happen means the odds are higher, so it's below 50 and that's good. So most economists don't believe it will happen. And that's even despite the Federal Reserve's monetary tightening. So I guess the odds are against a 10th of six recessions. Hatrick, get it? 10th of six. 

Odeta Kushi - Oh, I get it. That's the third econ joke, if you're keeping count. Predicting nine of five, or I guess 10 of six. Well, we've talked a lot about the possible path to a soft landing. A soft landing is a scenario where the Federal Reserve manages to get inflation back down to target without throwing the economy into a recession. And the path to a soft landing that we've discussed is through fewer job openings rather than more layoffs, which is exactly what's been happening. The labor market is cooling, but it's cooling through fewer job openings, while layoffs remain low.

Mark Fleming - That, of course, doesn't mean we will avoid recession forever. We've not licked the business cycle. But the path to a soft landing for this year is more likely than a recession, according to the Fred dashboard and the so-called experts. Now, we've talked a lot about economic recession on this episode, but what is the HCDC saying about a housing recession? Are we back in black on fire?

Odeta Kushi - Another '80s reference? Well, you've got the full HCDC committee on this podcast. The housing cycle dating committee is, well, it's self created. So it's us.

Mark Fleming - We like small committees, it's easier to get consensus.

Odeta Kushi - Well, sometimes, sometimes. 

Mark Fleming - True. True. 

Odeta Kushi - Now, our housing recession equivalent of the NBER methodology is based on the following indicators -- hourly earnings of non-supervisory construction workers, the total number of employees in residential building construction, the total number of employees in real estate rental and leasing, the number of single-family housing starts, private residential fixed investment, personal consumption expenditures on housing and utilities, existing-home sales and our Real House Price Index, which is a measure of affordability. So, if the moving average of the monthly growth rate of four of these eight indicators is negative for at least three consecutive months, then a housing recession has begun.

Mark Fleming - And, according to our housing recession indicator, the average length of a housing recession is 13 months. But there are a couple of notably longer exceptions that are pulling up that average, the 1988 to 1991 housing recession, which was 34 months long, more than two years, almost three, and the Global Financial Crisis housing recession that I'm sure many who are listening recall. That was 38 months long.

Odeta Kushi - And the Global Financial Crisis was also a double-dip recession with a 34-month long recession from 2006 to 2009. As sales and construction slowed dramatically, there was a brief pause of about five months and then a dip back into another recession for another 10 months in late 2009 and through most of 2010, caused primarily by another slowdown in construction and slower existing-home sales.

Mark Fleming - By comparison, the most recent housing recession from May to November of 2022, is notably shorter at seven months long. And in the latest data, only two housing recession indicators are flashing red, that is affordability, and existing-home sales. So no recession, according to our methodology, largely because of the factors we look at on the new-home sales or the homebuilding side of the housing market.

Odeta Kushi - That's exactly right. And we expect existing-home sales to pick up in the coming months as mortgage rates moderate. And we know that the new-home market has picked up as well, so it does seem right now that the worst is behind us and that the housing market has already had its recession and is now heading into recovery mode.

Mark Fleming - It sure seems that way. Now, before you go and add some qualifier -- on the one hand or the other-- about how it's always possible that things could change and get worse. Can we end the episode on that positive note?


Odeta Kushi - Okay, for once, I will not be a dismal scientist, but not happy about it. Okay, well, that's it for today. Thank you for joining us on this episode of The REconomy podcast. Thank you for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. We love to hear from our listeners. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2024 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.