December Housing Starts and Permits, January Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: Starts: -8.2%; 1-Family: -11.8%; Permits: -0.1%; 1-Family: +1.8%/ Phila. Fed (Manufacturing): -5.7 points/ Claims: -41,000

IN A NUTSHELL: “It has been a tough winter and the weather may have been a major factor in the construction slowdown.”

WHAT IT MEANS: I am already tired of winter and it is still the middle of January. Ugh! But there are only 27 days until the Phillies start spring training, so there is something to look forward to – my annual father/son trip to Clearwater. Builders across the nation had trouble coping with the weather in December. Housing starts plummeted, led by a double-digit drop in single-family construction. Every region posted a fall off in building activity. But the decline is likely to be temporary, as permits were largely flat and they increased for the key single-family segment. Over the last three months of 2017, permit requests ran over 4% higher than starts, so there is a lot of potential activity in the pipeline. If we ever get some good weather, those permits will be used.

While the economy seems to be accelerating, manufacturing activity is not gaining a lot of traction. Yesterday we saw that manufacturing production rose minimally in December. Today, the Philadelphia Fed’s survey of manufacturers indicated that there was not pick up in the first half of January. Activity was still decent, but the trend has been down, not up in the Middle Atlantic region. The details also supported the headline number. New orders expanded much less quickly, inventories built and order books thinned. Optimism about the future was also down. The only good elements of the report were the labor market numbers. Hiring held up and the workweek expanded. Employment expectations also remained solid.

Last week I said the jobless claims data were surprisingly soft and we needed to watch them. Well, never mind. New claims for unemployment insurance fell to one of their lowest levels ever. These data are seasonally adjusted on a weekly basis and that is really impossible to do. What we are probably just seeing is volatility due to weather and other factors that the adjustment factors are not built to account for. The labor market is tight and that is all that needs to be said.  

MARKETS AND FED POLICY IMPLICATIONS: In 2005, I was in Phoenix for a presentation to a venture capital company on the real estate market. I read in the Phoenix newspaper that housing prices in the region had risen over 20% over the year and that realtors believed that prices could increase that much or more over the next year. It was at that point that I started writing about housing bubbles. I admit, I had no idea how bad things would get, but that experience was something I have not forgotten. Consider the current environment. Stock indices were up 20% to 25% last year and have surged to start off this year. The Dow is up over 30% in a little over a year and has already jumped about 5.5% in just the first two weeks of this year. The S&P 500 has surged nearly 5% so far this year. And what are people saying? There is no reason to think that we cannot get another 20% plus increase this year. Sound familiar? Are there bubbles in the equity markets? In the immortal words of Alan Greenspan, “… it was very difficult to definitively identify a bubble until after the fact — that is, when it’s bursting confirmed its existence.” Apparently, we will have to wait until this bubble bursts, if it does, to confirm we are in an equity bubble. And along those lines, it is worthwhile to repeat a quote attributed to George Santayana: “Those who cannot remember the past are condemned to repeat it”. Just something to think about.