Many of you have seen this chart before but I thought given today's housing starts data it's was worth rolling out again. Its housing starts in red vs. US GDP YoY in green and as you can see the relationship is very solid over the last 62 years!
What the chart clearly shows is that EVERY GDP rebound in US has been led or at least accompanied by a rebound in housing starts. The one exception was the period 1963-66 (highlighted in blue), which occurred under Lyndon B. Johnson's presidency. Then as now the divergence in GDP from housing was heavily driven by government spending under the "Great Society" legislation, which included Medicare and Medicaid as well as significant spending on Vietnam (sound familiar). Ultimately, the binge was unsustainable and growth collapsed starting in 1966 as bond the vigilantes started to growl and inflation picked up.
This is the scenario I believe we are facing and I think that growth will erode significantly into the end of the year as the economy falters possibly dragging growth to -3% YoY by Q1 of 2011. Further fiscal spending will be impossible as the public mood is turning against spending and political gridlock will tighten ahead of this autumn's elections. The big difference between the 60's and now is that we aren't looking at inflation but full blown deflation.
Indeed, I expect tomorrow's YoY CPI to reinforce that risk as energy costs start to roll out of the calculations over the next few months and the headline number collapses. Just how far that series could fall is suggested by the second chart, which shows the NFIB Pricing question vs. CPI YoY and leaves me to believe we are heading towards - 0.75%.