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.