The U.S. Economy Has Become Significantly Less Cyclical

2025-08-25 15:45:00 ET

Many forecasters had expected the US economy to enter recession over the last 3 years as is normal during a Fed tightening cycle. A decline in the housing sector, triggered by a Fed tightening cycle, accounted for 12 out of 13 post WWII recessions with the contraction triggered when housing starts decline below 1.1MM (“The Hatfield Rule”). The only reason the US economy is not in recession is the housing sector has become less cyclical as home building has remained muted since the GFC with only an average of 1.1MM homes started with a peak of 1.8MM (see chart below). During the 10 years prior to the GFC starts averaged 1.7MM with a peak of 2.3MM. Consequently, there is a significant shortage of homes in the US of approximately 4MM homes. Also, there is now an active group to investors buying new homes to rent which provides for more resilient demand than existed in the past. When there is no boom in housing construction, the bust is far less significant as the rapid decline in construction and manufacturing employment is muted and the resulting impact on consumption due to layoffs is also smaller....

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