Uncle Sam is Leading the Way In Housing Construction … Will You Follow?

While everyone is distracted by the Greek debt drama, here’s what you really need to know.

The US economy and specifically the US housing construction market keeps humming along nicely.

Let’s put things in perspective. US GDP is something like $17 trillion a year. That’s trillion with a ‘t’. Greece’s current GDP sits at around $240 billion a year and has never gone higher than $360 billion.

Greece is a non-event compared to what’s happening in the US.

So here’s the news I’m following…

Follow the weight of money to get your financial bearings

When I say news, I should say this. I don’t get this information from the business section of the newspaper or from investment analysts. I simply follow the weight of money in the market.

One company you could follow is James Hardie Industries [ASX:JHX]. This company is a leader in the manufacture of fibre cement siding. Why do you care? Well, its main use or application is in residential construction.

That’s important because this company is well and truly connected to the US housing market. According to their annual report, the sale of fibre cement products in the US accounts for the bulk of its earnings, making up around 75% of company’s sales.

Speaking broadly, this company gives us some clues about the state of the economy in the US and more specifically about housing construction. In other words, you can use this stock as a barometer for new residential housing starts.

And what do we see?

James Hardie Industries [ASX:JHX] Weekly Chart

Source: STEX

Click to enlarge

2015 has been a stellar year for James Hardie Industries. It has been in a strong uptrend all year. It’s popped up in the new highs list again this week. Sales of newly built homes must be growing for this to happen. US housing starts are on the up. This has broader flow on effects for the US economy.

Whoever is buying these shares is obviously not worried about Greece. And that’s not to say they haven’t considered what’s happening there. How could you avoid reading about Greece — it’s in the paper every day.

That’s important for me to say. Why? Because investors know what’s happening in Greece and they’re buying James Hardie stock anyway. That is to say, they’re more excited by what they see in US housing than they are worried about what’s happening in Greece.

If they’re not worried, should you be? I’m not.

Of course, a single chart of James Hardie does not say it all about the US economy. So let’s take a look at another one.

An even better chart to watch

Take the SPDR S&P Homebuilders ETF [XHB].

This ETF invests in stocks that revolve around home building construction. These make up the largest sector of XHB, accounting for 26% of the ETF. A large portion of the remaining fund invests in stocks that provides home renovation, improvement and services.

And what do we see here?

SPDR S&P Homebuilders ETF – XHB Weekly Chart

Source: Market Analyst

Click to enlarge

At Cycles, Trends and Forecasts, we’ve profiled this chart before. It continues to hover around new highs. For this to happen, housing starts must be growing and earnings increasing for the companies within the ETF.

In fact, the Wall Street Journal reported this week that the home building sector can’t find enough trained staff — blue or white collar!

This is an industry that lost a lot of skilled staff after 2008 when it went into the biggest downturn for twenty years. This takes a long time to rebuild. But it also crimps the amount of supply the sector can bring on.

Your takeaway…

While this sort of construction is taking place, I reckon you’d be silly to be expecting a US recession. I’ll go on record here as saying that a US recession in 2015-16 is most unlikely.

And if the US is doing well, the rest of the world, including Australia, should be pulled along with it.

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.

We are seeing evidence of that in US car sales. On 1 July, the Wall Street Journal reported.

‘June’s seasonally adjusted annual selling pace was 17.16 million vehicles, the first time it has topped 17 million for two months in a row since 2005. That trend suggests the industry could hit 17.2 million in 2015, according to the National Auto Dealers Association, representing potentially the second-best year on record for the American car business.’

The weight of money is suggesting the US economy continues to hum along.

Over at Cycles, Trends and Forecasts we have the 18 year real estate clock to guide our investment decisions. The boom we are seeing now in US housing construction was entirely forecastable. We knew it was coming. More importantly, we know what to look for next, but do you? There are already early signs emerging. To learn more go here.


Terence Duffy,

For Markets and Money, Australia

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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