If you get your financial information from the press, or follow the investment analysts, a US recession always seems to be imminent.
The reason most analysts have misread the strength of the US economy for so long is because they don’t put enough emphasis on the housing market as an economic driver.
Housing underpins the wealth of the American middle class, not the stock market. And if you want to know how the US housing market is tracking, follow the weight of money.
You can do that by looking at the US home building ETFs.
The two largest ETFs in this sector, both by assets under management and trading volumes, are iShares U.S. Home Construction ETF [NYSE Arca:ITB] and SPDR S&P Homebuilders ETF [NYSE Arca:XHB].
Let’s bring up their monthly charts, side by side….
[Click to enlarge]
Cheaper land prices and record-low interest rates helped the US economy recover from the last economic crisis. And they’ve made homebuilding one of the best performing sectors for the last seven years or so.
Both homebuilding ETFs made a big push into new highs and had a stellar year in 2017.
For that to happen new home sales must be growing and earnings must be increasing for the companies within the ETFs.
At the end of 2017 the financial press reported new home sales in the US were setting records.
But see how both charts broke out of a sideways pattern in early 2017? That was forecasting for you in advance that new home sales were growing.
The market knew that news at least six months ago. You must come to understand this.
All that building has broader flow on effects for the US economy, such as home furnishing and appliances.
Whilst this sort of construction is taking place, I reckon you’d be silly to be expecting a US recession, as some are doing.
And if the US is doing well, the rest of the world, including Australia, should be OK.
Don’t forget, all this construction broadly implies a continued run of strong job growth. The home construction sector will lift the broader US economy into stronger growth.
There’s plenty of momentum to come from the US housing market. This is important because it will drive the US economy.
And yet this process is widely underappreciated in the mainstream media. Hence why there’s a persistent sense that the US is close to a recession.
I don’t see that happening in the immediate future. The charts aren’t suggesting it.
These ETFs suggest strong demand for housing, which is being fueled by a labour market near full employment.
I struggle to see how these analysts can call an imminent US recession.
But if you want to look for warning signs of a real US recession, follow both these ETFs.
Consider the last recession of 2008. These ETFs were being sold down heavily throughout 2006, while the Dow and S&P 500 were still in a strong uptrend.
Significantly, ITB and XHB broke monthly lows in mid-2007. All the while, the Dow and S&P 500 were still rising, and yet to reach their top in October 2007.
Because major recessions are land related, these ETFs will prove to be a good leading indicator, forewarning of the economic crisis to come.
While these two ETFs are similar, they’re a long way from being identical.
For a start, they follow different indices. Also the ITB employs a market cap weighted approach and gives a large weighting to dedicated homebuilding stocks.
The XHB gives equal weight to home furnishing, kitchenware and mattress companies with pure play homebuilders.
ITB is a better play on pure home building, XHB is more diversified. You have a choice.
For simply reading the US economy, both are handy to keep in a watchlist. It’s hard to see the US going into a recession while these ETFs are where they are right now.
Both these ETFs have really run in 2017. You would be left hanging a bit, buying right here. It is far better to buy the breaks out of those sideways moves, like they were in the early part of 2017.
At Money Morning Trader we see plenty of those types of moves. Go here to find out more.
Editor, Money Morning Trader