Is housing or manufacturing a better weathervane for the recovery?

July 5, 2012

Is the data showing us an economy in recovery, or one about to fall off another cliff? It depends on which sector you're looking at.

The leading indicators for manufacturing have been in a tailspin, while new home construction, housing prices and new home sales have all been on the rise. "If someone looked at just manufacturing, they might think the US is near a recession," Calculated Risk's Bill McBride writes. "And if they just looked at housing, they'd think the economy is recovering. Which is it?"

housing recovery construction new homes (Laura Rauch / Associated Press)

McBride makes the case that housing is a better weather vane for the overall direction of the economy:

Historically, housing leads the economy both into and out of recessions (not out of the recession this time because of the excess supply in 2009). Manufacturing is more coincident. So the [Institute for Supply Management manufacturing] index suggests some weakness now - mostly abroad - whereas housing suggests an ongoing sluggish recovery. Who ya gonna call? Housing.

What's more, since manufacturing was one of the few sectors to pick up right after the 2008 crash, much of its growth potential might already be realized. Housing, by contrast, has been stuck in the doldrums for more than four years, holding back the U.S. recovery the whole time. So the signs of a pickup in housing are particularly encouraging, as once it begins, it could keep on for quite some time.

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