This Week’s Developments in the US Economy

The Implications of Decelerating New Supply in the Residential Sector

Residential construction data released this week by the US Census Bureau exhibits a compelling picture of rapidly decelerating supply occurring over the next few years. While the headline year-over-year increase in completions indicates a short-term boost in supply, the continued decline in forward pipeline activity suggests a meaningful slowdown and likelihood of upcoming supply constraints in both multifamily and single-family rental sectors. The pipeline, particularly for multifamily housing, points to shortfalls on the horizon, with select high-migration markets experiencing increasing household and rentership growth according to the latest Census ACS data released last week. Additionally, the Housing Market Index (“HMI”) is again on a downward trajectory, a likely product of rising mortgage rates and a higher-for-longer rate environment. In exploring these conditions in greater depth, we see conditions improving our outlook for the residential sector.

Housing Supply Chain

To understand the cycle of residential construction, we look at both headline and sector figures at different stages of the production cycle. Unsurprisingly, multifamily and single-family production are seeing slowdowns occurring at a different pace as the headline rate would otherwise suggest. For example, the headline permit rate for August came in at a seasonally adjusted annual rate of 1,543,000. This figure marks a 6.9% increase from the revised July rate of 1,443,000, but in comparing the same period from the prior year we see a 2.7% drop from August 2022, which stood at 1,586,000. While units under construction have experienced a slight year-over-year decrease of 0.8%, the overall decline in housing starts is even more pronounced, plunging by 14.8%.

Separating construction activity into single-family and multifamily, we observe more nuanced trends. Despite modest year-over-year growth in housing starts and permitting activities for single-family homes, the 16.3% year-over-year decrease in units under construction suggests a meaningful pullback in the near-term. This year-over-year increase in starts and permits implies that builders may be inclined to add more units to the market to address the supply shortage, but their enthusiasm is tempered by concerns arising from the elevated interest rate environment, as we explore later in the section.

The longer-term implications of a shrinking pipeline are even more striking in the multifamily housing sector. While completions and units under construction have surged in comparison to the previous year, the forward pipeline paints a contrasting picture, with starts plummeting by 41.0% year-over-year and permits decreasing by 17.7% year-over-year. In our view, the momentum of these data suggests supply constraints in the coming years despite a temporary bump in near-term supply.

High-Migration Markets Are Still Seeing Household and Rentership Growth

For many high in-migration markets, particularly those in Sunbelt region, we have seen these construction shifts occurring during a significant uptick in year-over-year household and rentership growth, according to the 2022 ACS 1-Year Estimates released last week. Several of these metropolitan areas have experienced significant expansion in new construction over the past two years, with renter growth data suggesting persistent demand for rental units. Notable examples include Greensboro, Orlando, and Nashville, where renter growth surged into the double digits between 2021 and 2022 (see accompanying visual).

Single-family Housing Market Sentiment versus Continued Demand from Owners and Renters Alike

Despite signals pointing to demand tailwinds, we are observing a continuous descent in the NAHB/Wells Fargo HMI throughout August and September, mirroring a pattern observed in August 2022, which further deteriorated as the year progressed. The outlook for the next six months has also taken a pessimistic turn after having improved briefly in April this year. The recent surge in mortgage rates, above 7.0% over the past four weeks, has coincided with additional negative sentiment. Assuming these sentiment indices are indications of homebuilders’ activity going forward, we see a high likelihood of supply constraints across residential product lines ahead.

This Week’s Developments in the Global Economy

Driving Logistics: Shifting Trade Dynamics Versus Recalibrated Supply Chains

To contextualize recently released growth forecasts we look at potential implications for global trade and supply chains. In particular, we are focused on the potential correlation between the growth prospects of several emerging countries increasing their share of trade with the US as supply chains have recalibrated meaningfully over the past several years. Specifically, in the Organization for Economic Co-operation and Development’s (“OECD”) most recent economic update released this week, we observed an improved outlook for some of these developing economies. Our view is that, amid decelerating economic activity with major trade partners such as Germany and China, the implications of these trade shifts through supply chain reconfiguration will meaningfully influence the demand drivers for US logistics.

Growth Projections and Shifting Trade Dynamics

The most recent economic outlook of the OECD underscores the continued resilience of the US and some of its peers while highlighting challenges elsewhere. The expectations for US growth in 2023 is 2.2%, 60 basis points higher than the OECD’s June 2023 projection. Similarly, Mexico—the second largest source of US imports—saw a 70-basis point increase to the 2023 projected growth when compared to the June release. Conversely, major US trading partners Germany and China have seen downward revisions to their 2023 growth projections. Germany, although unlikely to be disruptive to the US economy, is currently experiencing a deepening slowdown, and China is seeing a weaker-than-expected post-pandemic reopening.

Both Germany and China, but China in particular (see accompanying visual), have observed a decline in their share of the US import market in recent years. Various factors, including tariffs imposed on Chinese goods as well as measurable investments in reshoring and nearshoring initiatives may have contributed to meaningful shifts in US trade dynamics. Select emerging markets, have seen an expanding share in the US import market. Mexico, increasing imports to the US by 45% between 2017 and 2022, illustrates the growth in demand for land freight logistics. The strength of the US domestic demand is affirmed by wage and spending data. Likewise, imports from Vietnam to the US have increased by approximately 180% during the same period, and, combined with the normalization of prices from Baltic Dry Index, highlights the still-dominant segment of sea freight logistics.