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.