Data released yesterday shows that housing starts and building permits have dropped to their lowest levels since mid-2020, and lumber prices are responding.
Let’s get into the numbers here. On the surface, this is about future construction activity: As of yesterday’s close, lumber is down 9.7% over the last month and down 15% since this time last year. Permit issuance dropped 3.8% last month to an annualized pace of 1.38 million, down from 1.44 million in April. (Compare this to estimates made by economists who expected May to bring a rise in permits.) Everyone is getting housing wrong now (just like I did a year ago). The interest rate lags are beginning to hit, and housing construction is clearly telling you the impacts are just starting to manifest.
But cratering housing activity is only part of the picture. How much longer can the broader stock market be held up by Nvidia 
NVDA before reality sets in? The economy as a whole is slowing down markedly beneath the surface, and these slumping building permits and housing starts are leading indicators.
Lumber prices reflecting the bigger picture
Construction is an important source of jobs and economic growth, as it requires materials and ongoing services. Fewer permits means fewer projects. This in turn reduces the number of construction-related jobs, demand for materials and services, expansion of related industries (such as manufacturing and retail), consumer spending, and so on.
The data isn’t good, which matters for U.S. markets. Lumber is likely to continue its downtrend in response; it is one of the most expensive materials used in a new home, and homebuilder sentiment has a big impact on lumber’s prices. As homebuilding permits and housing starts slump, lumber demand slacks and prices fall — just as we are seeing today.
Signs the economy is losing steam are everywhere; excitement over Nvidia and all things AI can not maintain the denial forever. Homebuilder stocks look terrible here, which is mirrored in languishing small-cap stocks all across the market. If housing starts and building permits continue to weaken, it suggests that, yes, a recession remains in play — potentially this year.