KEY DATA: Starts: -11.2%; Permits: +0.3%/ Confidence: +9.7 points/ Phil. Fed (NonMan.): +9.0 points
IN A NUTSHELL: “The wild swings in the data continue so we shouldn’t rush to judgment on the state of the economy.”
WHAT IT MEANS: I’ve been doing this for a very long time and while I haven’t seen it all, the current data seem awfully volatile. Today’s numbers continue that trend. Housing starts cratered in December, which was a surprise. Yes, we knew that construction peaked in the spring, but the collapse at the end of the year made no sense, especially given that housing permit requests remained solid. Indeed, during the fourth quarter of last year, permits ran nearly twelve percent above starts. Since builders stopped spec building many years ago, that differential is likely to be narrowed in the months to come. Of course, January is problematic as the weather was brutal. Basically, housing is likely to be stronger going forward than the data indicate, but not strong.
Not surprisingly, consumer confidence rebounded sharply in February. The Conference Board’s current conditions component rose modestly but the expectations component surged. Basically, the government shutdown ended and so did the total disgust with Washington. Now we can go back to being only disgusted with Washington.
As far as business activity is concerned, the Philadelphia Fed’s NonManufacturing survey rebounded sharply in February. Again, special conditions were at work. The frigid weather, coupled with the government chaos, led to a huge drop in the index in January. With conditions improving in February, it was hardly a shock to see the current and future conditions measures jump. The Richmond Fed’s Manufacturing Index posted a similar pattern, as activity rebounded in February after a January lull.
MARKETS AND FED POLICY IMPLICATIONS: On Thursday we get the first (and in this case second as well) reading on fourth quarter GDP growth. Don’t expect anything great. Indeed, only a possible large increase in inventories may have kept the number from coming in below 2%. Housing should be one of those components that will depress the growth rate. But neither consumer nor business spending look like they were stellar. I still think the estimate should come in somewhere between 2.00% and 2.50%, but given the wild swings in the data, I am not sure. Regardless, the economy is moderating and we are headed back to more normal growth, which is roughly about 2.25%. That is neither too cold nor too hot, which means the Fed should be able to maintain its cautious approach to monetary policy. Indeed, Fed Chair Powell, in his semi-annual testimony to Congress, reiterated that today. The Fed could reconsider raising rates, but it will take stronger growth for it to start hiking again. As I have noted before, I think that is a mistake. The current level of the funds rate is not high enough to provide much ammunition if the economy falters. The idea was to get back to normal. Since the Fed keeps arguing that rate policy is its primary tool, by failing to raise rates to higher levels when the economy is in good shape, and it is, the members are betting they don’t face a major recession in the relative near term. I hope they are correct.