KEY DATA: Starts: -1.6%; 1-Family: -5.6%; Multi-Family: +6.7%; Permits: -5.2%; 1-Family: -1.2%; Multi-Family: -11%
IN A NUTSHELL: “The housing sector may not be restraining growth, but it is hardly adding much to it.”
WHAT IT MEANS: The housing sector is neither too hot nor too cold. But that doesn’t make it just right. Activity is improving, but in fits and starts – pardon the pun. Construction activity eased in November but that came after an upward revision to the October housing starts numbers. That had come in as a decline but is now put at a modest rise. The issue in November was single-family construction, which was off sharply. This component is bouncing around but the trend has been upward, even if it is not a steep slope. The multi-family number rose sharply, but large changes is usual for this very volatile number. So far this year, housing starts are up over 8% compared to the first eleven months of 2013, so it is hard to complain about the housing sector. Looking forward, permit requests were off but again, the multi-family segment drove the rise. Permits are running only a little above starts for the last two months and that points to minimal gains in construction activity in the coming months.
MARKETS AND FED POLICY IMPLICATIONS: So far this quarter, starts are up at a little less than 3% annualized pace from the third quarter. It looks like housing could add to growth again, but unless there is a lot more activity in December, any addition will be relatively modest. Nevertheless, I will take it. With oil prices plummeting, there is every reason to expect that consumer spending will be strong this quarter. Indeed, my forecast calls for another quarter of GDP growth in excess of 3.5%, which would make it five out of the last six. Yesterday’s November industrial production number was really strong. So far this quarter, manufacturing output is growing at a robust 4.4% annualized pace and that could rise with any decent increase in December. Job gains have been strong and we got our first glimpse at solidly rising wages. Yes, Europe and Japan are worries and some countries are being battered by the low price of oil. In spite of that, the U.S. economy is on an accelerating growth path that should continue for quite some time. We don’t need a robust housing market to drive growth. There are other sectors, including consumer spending and non-energy investing that should be strong enough to keep the economy moving forward solidly. So why are investors so negative? Remember, Wall Street and Main Street are so totally disconnected that we cannot go directly from the economic data to market performance. Declining oil prices may be wonderful for the macro economy but if it hurts certain members of a stock index, then you get a decline. Ultimately, when it is clear how much additional growth and earnings we will get from an extended period of low energy costs, the markets should reflect that reality. And that is what I expect the Fed to talk about when the FOMC statement is released tomorrow.
KEY DATA: Starts: -2.8%; 1-Family: +4.2%; Multi-Family: -15.4%; Permits: +4.8%
IN A NUTSHELL: “Home building is holding in and with permits rising, it looks like additional construction could be on the way.”
WHAT IT MEANS: Builders have become quite optimistic, but the real question is: Are they translating that good feeling in action? In October, at least, that just didn’t happen in all segments of the market. Housing starts fell, but that was due to a huge drop in the very volatile multi-family segment. That is not that unusual. Single-family construction rose to its second-highest level since spring, 2008. Of course, the housing bubble had already burst by then, but at least we are moving forward. We still have a long way to go, though, before we get back to solid levels. Still, so far this year, starts are up by nearly 10% compared to the first ten months of 2013. In any event, permit requests are running a little ahead of starts causing the number of units permitted but not started to jump. That permit excess implies that building activity should start ramping up in those areas not covered with snow or ice.
MARKETS AND FED POLICY IMPLICATIONS: The jump in the National Association of Home Builders index signaled growing confidence in the housing sector and low rates are leading to growing mortgage applications, so it is just a matter of time before builders start putting more shovels in the ground. That permit request are outpacing starts just reinforces that view because builders stopped speculating a long time ago. That doesn’t necessarily mean we will a large increase in November. The massive snowstorms and deep freeze will probably temporarily slow things down. But housing is moving forward and that is what is important. For the Fed members, this type of report allows everyone to sit around and do nothing. The starts numbers are neither weak, nor strong, nor not even just right. They are just another sign of an economy that has yet to truly break out to the upside. As for investors, I guess if you don’t set a new record on any given day, it is a disappointment so maybe record setting is the key driving force. It cannot be that the U.S. economy is so strong and the world economy is looking so good that happy days are here again.
KEY DATA: Starts: +6.5%; 1-Family: +1.1%; Permits: +1.5%; 1-Family: -0.5%
IN A NUTSHELL: “Builders keep putting those shovels in the ground and that is another sign that what happens on Wall Street probably just happens only on Wall Street.”
WHAT IT MEANS: The roller coaster that has been the equity markets may continue, but since Wall Street and Main Street are so delinked, we need to remember, “it’s the economy, stupid”. Where would we be if we didn’t have James Carville? Anyway, the latest indicator of economic activity, housing starts and permits, showed that the housing sector continues to improve. Starts rose solidly in September, driven by a large jump in multi-family activity. As boomers and millenials look to higher density housing, this segment is likely to be the key driving force for the sector for a while. The larger single-family component was up as well. Permit requests rose modestly as well and are in line with starts, so builders are no longer getting ahead themselves. Will the increase in construction continue? Housing permit requests during the third quarter were only about two percent greater than housing starts, the number of homes permitted but not started has been filtering downward and the number of homes under construction is up almost 20% from September 2013. All of those indicators point to only modest increases in construction in the next few months.
MARKETS AND FED POLICY IMPLICATIONS: As I noted yesterday, it should not have surprised anyone that a correction in the markets would eventually occur, given how outsized the equity price gains were compared to the increase in economic activity. When reality was going to set in and the extent of the movement was, of course, unknown. Otherwise I would be on the beach, not in my office. But it is hardly bad and how long it will last is beyond my abilities. I am just an economist, often confused why equity prices move in ways that don’t seem to be supported by the economics. Regardless, the economy is still growing at a decent pace. Third quarter housing starts were up about 4% from the second quarter, so housing should add nicely to growth when third quarter GDP comes out on October 30th. The biggest uncertainty is not housing or the labor market or business investment: It is consumer confidence. ISIL, Ebola and the stock markets are real concerns. Will confidence decline? Surprisingly, the Thompson Reuters/University of Michigan’s mid-month reading of confidence went up, as expectations rose. Wall Street may be Wall Street but the falling cost of filling up the clunker may be dominating perceptions. That is a positive sign for future growth.
KEY DATA: Starts: -14.4%; 1-Family: -2.4%; Permits: -5.4%; 1-Family: -0.8%/Claims: 280,000 (down 36,000)
IN A NUTSHELL: “Home construction keeps bouncing around but with builder confidence soaring, it is likely the August slump will be followed by a September surge.”
WHAT IT MEANS: Housing starts cratered in August but the Alfred E. Neuman in me holds strong: I am not worried. July’s level was revised up to the highest rate in nearly seven years. A 31.5% decline in buildings of five units or more was the major reason for the August drop and this component is extremely volatile. For the first eight months of the year, starts are up by nearly nine percent, keeping up hopes that we could see another double-digit rise in construction activity. I think that is likely for two reasons. First, permits are still running above starts. That points to an acceleration in construction. Second, the National Association of Home Builders/Wells Fargo Housing Market Index surged in August to its highest level since November 2005. Builders can get irrationally exuberant at times, but that is usually when construction activity is surging. So look for a rebound when the September numbers come out.
With the Fed still focusing on labor, the sharp drop in the weekly jobless claims number was eye opening. We are about as low as can be expected. Don’t be surprised if this number soars soon. The closing of three casinos in Atlantic City will likely mess up the data for a short time. Also, the Philadelphia Fed’s Business Outlook Survey showed that activity grew at a somewhat slower pace in September. Nevertheless, orders were strong, backlogs grew and hiring jumped. Those details point to continued strength in the manufacturing sector.
MARKETS AND FED POLICY IMPLICATIONS: Housing continues to improve even if the gains are inconsistent. Builders are a pretty confident bunch and that can only be because they are seeing activity pick up. Thus, the fall off in construction activity should not be viewed as any sign of weakness. With the labor market tightening, Janet Yellen may be repeating her point that if the data are stronger than expected, the Fed is prepared to act sooner than whatever the term “extended period” means. Indeed, if housing starts do bounce back and manufacturing continues to grow strongly, that is precisely what the Fed will have to do. Regardless, investors may be a bit confused by the inconsistencies of these numbers but that has never stopped them before.
A further thought on the Fed’s leaving in “extended period” in the statement. Given her weird comments about the meaning of the phrase, that it was not calendar based but data based, I can only conclude that the Fed members would like to remove the words but only when they think the markets will not overreact. They don’t want another 100 basis point gap up in rates. I suspect that as soon as there are consistently robust job gains and the unemployment rate drops below 6%, which could happen by the end of the year, the phrase will be removed. December is my guess.
KEY DATA: Starts: -9.3%; 1-Family: -9%; Permits: -4.2%/Claims: 302,000 (down 3,000)
IN A NUTSHELL: “We thought that home construction would surge this spring but instead it has fizzled, despite improving labor market conditions.”
WHAT IT MEANS: I know this will probably date me but does anyone remember the Vanguard rockets that were supposed to launch our satellites into space? No? Not surprising, since most of them went up and the fell back right to earth. Well, the home construction sector, which was supposed to rocket us into stronger growth looks more like a Vanguard than the Atlas V that successfully sent our men to the moon. Yes, I miss the space program. Housing starts posted a second consecutive big decline in June. After rebounding sharply in April from the winter weather, builders seem to be getting more cautious. This is a real surprise. First of all, permits, while down in June as well, have been running about five percent above starts for the last two months. Builders are not paying for permits unless they expect to build those units. The number of homes authorized but not started also jumped. And finally, builder confidence soared in June, according to the National Association of Home Builders. So what is going on? I am not certain but the nearly thirty percent decline in starts in the South has to be suspect. I could understand it if there was just a huge decline in the volatile multi-family sector, but the single-family component also dropped sharply. In the rest of the country, activity was up. So let’s wait a while before we jump to any conclusions about the state of the housing market.
The good news today was the drop in jobless claims. We are looking at levels not seen since 2007 and when you adjust for the size of the labor force, we are approaching record lows. The monthly surge in the number of jobs being created and the continuous drop in the unemployment rate is no fluke. The July jobs report is setting up to be another really good one.
MARKETS AND FED POLICY IMPLICATIONS: Home construction is a critical component of any strong economy and right now, activity seems to be faltering. But I just don’t believe that the headline number is telling the whole story. The huge fall off in the South makes no sense, especially given that starts rose everywhere else and other indicators point to rising activity. So my suggestion is that we feel disappointed by the report but don’t get too worked up about it. What I think investors should focus on is the jobless claims data. The labor market is tightening. Firms are not cutting workers and people are finding jobs. Don’t be surprised if the unemployment rate dips below 6% by the fall and with full employment at around 5.5%, it is hard to believe that labor shortages will not start appearing across industries, occupations and regions. The real question is: When will businesses feel compelled to raise wages to attract workers? I have said this before and I will keep saying it, that time is coming, likely before the end of the year, and once the wage dam breaks, retention issues will arise and compensation costs will become the main topic of discussion at the Fed. But Fed Chair Yellen is content to wait until she actually sees that happen so rate hikes are still well into the future.
KEY DATA: CPI: +0.4%; Excluding Food and Energy: +0.3%/Real Earnings: -0.2%/Starts: -6.5%; Permits: -6.4%
IN A NUTSHELL: “Rising consumer prices continue to sap consumer spending power and that is not helping the housing market either.”
WHAT IT MEANS: I’ll admit that I am an optimist about the economy. I believe that growth is strong enough to create the tight labor conditions that will cause wages to rise and the economy to surge. But the pathway to nirvana remains slow. Consumer prices jumped in May and it wasn’t all energy or food, which were up sharply. Costs of a variety of services such as shelter, medical care and transportation also increased. On the positive side, most non-food or energy commodity prices were well contained, so consumers had at least some respite from the insidious costs of inflation. That said, the jump in consumer prices, coupled with more modest gains in earnings meant that consumer spending power went down again. Since May 2013, real weekly earnings have declined, yes declined, by 0.1%. Any further questions about why the economy is not growing rapidly? “The fault, dear business community, is not at the Fed or in Washington, but it is in ourselves, that we don’t pay our underlings”. (My apologies to Shakespeare and Cassius.)
As for the housing market, it took a bit of a step backward in May as housing starts moderated. That said, the pace of construction so far this quarter is up by double-digits over the weather restrained first quarter total, so housing should add to growth, possibly significantly. Permits were off as well, but they had been running well above the start rate for most of the year and now they are more closely aligned. Continued increases in the number of homes under construction raises a warning that additional gains in starts may be limited unless sales pick up a lot.
MARKETS AND FED POLICY IMPLICATIONS: These were not reports that anyone was hoping for. Indeed, it would have been nice if inflation was more moderate and construction was more robust, but that just was not the case in May. I am not that worried about the housing sector, as conditions seem to be moving forward, though hardly at a breakneck pace. It is inflation that concerns me. The Fed has been not been overly worried about inflation, except to note it is below target and expectation are stable. The issue is spending power, which remains the missing link in the recovery. Softer wholesale food prices hold out hope that consumer prices may moderate but Iraq is hardly helpful when it comes to energy costs. With that as a background, the Fed is meeting and will have to figure out what is happening. Tomorrow’s statement, projections and press conference should be very interesting.