A slowdown in building permits may be flashing one of the clearest warnings yet that the U.S. economy is heading toward recession, according to Mark Zandi, chief economist at Moody’s Analytics. In a post on X, Zandi described residential building permits as the “most critical economic variable” his firm tracks and said their recent slump is hard to ignore.
Builders had kept permits steady earlier this year by offering incentives such as mortgage rate buydowns, Zandi explained, but rising inventories of unsold homes are forcing them to cut back. “Permits have started to slump,” he wrote. “They are now as low as they’ve been since the pandemic shutdowns.”
Moody’s arrived at that conclusion with the help of machine learning, training its system on decades of economic data to see which variables consistently flagged trouble signs. Residential permits emerged as the strongest indicator. A GlobeSt.com review of data from the Federal Reserve Bank of St. Louis shows that deep declines in permitting typically precede recessions by anywhere from seven to 26 months. The widest gap occurred between September 2005 and the start of the global financial crisis in November 2007, a spread of 27 months. That variability makes it difficult to time a downturn precisely, but the connection remains strong.
Zandi told Fortune that the machine learning model currently places the odds of a U.S. recession in the next 12 months at 48 percent — the highest probability Moody’s has ever recorded without a recession following. While Zandi cautioned that even the most reliable warning sign is not the same as a guarantee, he stressed that the correlation is too consistent to dismiss.
Federal Reserve data reinforces the picture. The number of privately owned housing units under construction has been falling since mid-2023 and more distinctly since April this year. That reversal may be feeding into the permitting downturn.
The fact that residential permits carry such weight, while commercial permits don’t, may come down to timing and scale. Consumer spending accounts for about 69 percent of U.S. GDP, and housing decisions often ripple quickly through the broader economy. As Zandi noted, sales tactics can bolster demand temporarily, but if buyers step back, builders have little choice but to reduce supply — and that shows up in fewer permits.
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