All manner of economic indicators once again have us puzzled as to what direction the economy is headed and far too many continue to raise doubts that we are headed for a recession.
Yes, there are some headlines regarding layoffs in the tech industry that appears to be a re-balancing of employment numbers that have just reflected unbridled growth at both big-name companies and small, as the competition in a tight labor market kept a flame burning under employment growth.
Each of the big layoff announcements at the largest companies have been driven by different factors.
- At Facebook’s parent Meta, founder Mark Zuckerberg placed a huge bet on the Metaverse, a move that has erased $800 billion in market capitalization since last September, more than the entire market cap of Exxon Mobil, Berkshire Hathaway and almost every company in the S&P 500.
- Amazon is laying off 10,000 corporate staff, but in reality, it is less than 1% of its global workforce, which exceeded 1.5 million people at the end of September.
- Disney just ditched its CEO who had been on the job for two years.
- Twitter, which Elon Musk is trying to “reimagine in his own style,” has shed thousands of jobs with more to come.
- Salesforce, Snap, Redfin… the list goes on.
The Good News. But then out comes the news that GDP grew in the third quarter by 2.6%, a rate we all considered reasonable and customary in pre-pandemic times. And the U. S. Bureau of Labor Statistics reports the unemployment rate remains stable, with very little movement. It increased by 0.2% to 3.7% in October, up from September’s 29-month low of 3.5% and slightly above market expectations of 3.6%.
The jobless rate has been in a narrow range of 3.5% to 3.7% since March, suggesting that the labor market is already very tight, which in turn is likely to contribute significantly to inflationary pressure in the world’s largest economy for some time to come. The number of unemployed persons rose by 306,000 to 6.06 million in October, while the number of employed decreased by 328,000 to 158.6 million. The labor force participation rate edged down to 62.2% from 62.3%.
And what’s more, the overall construction industry seems to be on its own island of prosperity. The Dodge Momentum Index, which I consider to be the Dow Jones Industrial Average of the construction industry and is considered by many to be the gold standard of measuring future industry performance, rose an eye-watering 9.6% in October, continuing its steady increase. On a year-over-year basis, the index is up 28%, with the commercial component up 29% and institutional planning up 25%.
Home Construction. On the new home construction side, elevated interest rates, stubbornly high building material costs and declining affordability conditions that are pushing more buyers to the sidelines and continue to drag down builder sentiment.
Builder confidence in the market for newly built single-family homes posted its 11th straight monthly decline in November, dropping five points to 33, according to the National Association of Home Builders/Wells Fargo Housing Market Index. This is the lowest confidence reading since June 2012, with the exception of the onset of the pandemic in the spring of 2020.
Yet in another paradox that continues to puzzle many, shares of home builders, building-products and appliance companies are rebounding and outperforming the broader stock market. The SPDR S&P Homebuilders exchange-traded fund rose 9.3% recently, posting its strongest run since April 2020. The combined performance of the SPDR fund has beaten the benchmark S&P 500 index so far this year. Obviously, the smart investor market sees a rebound in the near future.
In an economy where unemployment numbers remain low, GDP continues to hover above neutral, and the construction industry seems to be outperforming so many other sectors, its hard to see how a recession could materialize. But in my heart-of-hearts, despite strong indicators to the contrary, I think a mild one will still come next year, as we will ourselves into a slowdown. Remember, sentiment is self-fulfilling.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.