Even though it\u2019s less than 50%, Zandi pointed out that the probability has never been that high previously without the economy eventually slipping into a downturn.<\/p>\n
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A crucial component in the Moody\u2019s indicator comes from the housing market. <\/p>\n
\u201cThe algorithm has identified building permits as the most critical economic variable for predicting recessions. And while permits had been holding up reasonably well, as builders supported sales through interest rate buydowns and other incentives, inventories of unsold homes are now high and on the rise,\u201d Zandi warned. <\/p>\n
\u201cIn response, builders are pulling back, and permits have started to slump. They are now as low as they\u2019ve been since the pandemic shutdowns.\u201d<\/p>\n
Last month, the Census Bureau reported that residential building permits in July<\/a> were at a seasonally adjusted annual rate of 1.35 million, down 2.8% from the prior month and down 5.7% from a year ago.<\/p>\n In July, Zandi singled out the housing market for concern, escalating it to a \u201cred flare\u201d<\/a> as home sales, homebuilding, and house prices were getting squeezed by elevated mortgage rates. <\/p>\n While the 30-year fixed rate has since come down<\/a> from near 7% to about 6.3%, it\u2019s not clear yet if that\u2019s low enough to revive builders or how much it will continue to drop. On Sunday, Zandi said all eyes should be on August permit data, which will come out on Wednesday. <\/p>\n \u201cThey are sure to provide another reason why the Fed should and will announce a rate cut later that day,\u201d he predicted.<\/p>\n In fact, Federal Reserve policymakers have already started worrying<\/a> about the housing market. Minutes from the central bank\u2019s July meeting revealed concerns about weak housing demand, rising supply, and falling home prices.<\/p>\n And not only did housing show up on the Fed\u2019s radar, officials flagged it as a potential risk to jobs, along with artificial intelligence technology.<\/p>\n \u201cIn addition to tariff-induced risks, potential downside risks to employment mentioned by participants included a possible tightening of financial conditions due to a rise in risk premiums, a more substantial deterioration in the housing market, and the risk that the increased use of AI in the workplace may lower employment,\u201d the minutes\u00a0said.<\/p>\n Permits aren\u2019t the only housing market data point to follow. The economist\u00a0Ed Leamer,\u00a0who passed away in February<\/a>, famously published a paper in 2007 that said residential investment is the best leading indicator of an oncoming recession.<\/p>\n On that score, the data doesn\u2019t look good either. In the second quarter<\/a>, residential investment tumbled 4.7%, accelerating from the first quarter\u2019s 1.3% decline.\n<\/p>\n![\"\"](\"https:\/\/www.newsbeep.com\/us\/wp-content\/uploads\/2025\/09\/building-permits-09142025-e1757871520119.png\"\/)
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