KEY DATA: Starts: +5.8%; 1-Family: +12%; Permits: +4.5%; 1-Family: +7.8%/ Phil. Fed: +17.4 points; Orders: +28.1 points; Expectations: +9.7 points/ Claims: -26,000
IN A NUTSHELL: “The economy looks like it might have caught a second breath.”
WHAT IT MEANS: The economic data seemed to be fading toward the end of 2020, but the latest reports show the exact opposite happening. Home starts soared in December to its highest level since September 2006. All the increase was in single-family construction, as multi-family activity was down double-digits. The apartment component of this report is fairly volatile, so I would not read too much into the decline. Looking forward, permit requests for single-family houses were up solidly, even as multi-family permits were down. The number of units permitted but not yet started was largely flat, though it remains at a high level. The report points to further growth in the single-family component of home construction.
The Philadelphia Fed’s index of manufacturing activity posted a sharp rise in January. Demand surged, causing backlogs and hiring to increase solidly. But we also saw both the costs of inputs and prices for outputs jump. I am not saying inflation is on the rise, but it is likely moving up and should continue to do so, albeit slowly. Expectations also improved, though many of the components were down.
Weekly claims for unemployment insurance fell last week. But when you are looking at 900,000 people being added to the rolls, you cannot say labor market conditions are really good. There are two factors at work that make forecasting trends in claims uncertain. The stimulus bill passed in December should bring back onto the rolls workers whose benefits ran out. If that is the case, claims could be headed back up and we are already starting at an incredibly high level. But some areas shut things down over the holidays and as they reopen, fewer workers might apply for compensation. My guess is that the trend will be up, but not sharply.
IMPLICATIONS: The strong remain strong. Housing and manufacturing have been leading the recovery and it looks like they will continue to do so. But the labor market remains iffy, which is a technical economic term for not so good. The number of workers being let go every week is not consistent with much if any job gains. Payrolls declined in December and the January increase could be modest. Given the vaccination process is not going smoothly, don’t expect businesses to get exuberant about hiring. Without strong job increases, it is not likely the economy can continue growing at a strong pace. There is only so much two sectors can do to carry the load. It is still early in the quarter and much can change. President Biden has proposed another stimulus package which is twice the size of the one passed in December. That might happen, but given the politics in Washington, it is likely to take a few months before any progress is made and it is doubtful it will approach anything close to the $1.9 trillion he is hoping for. That said, just talk of a large stimulus package has to get investors salivating, so don’t be surprised if the markets continue their upward climb.