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.