KEY DATA: Starts: -0.9%; 1- Family: -6.4%; Permits: +0.3%; 1-Family: +3.7%

IN A NUTSHELL:  “Housing continues to wander along, not doing much better but not weakening a whole lot.”

WHAT IT MEANS:  If the housing sector was the canary in the mine, it would not be falling over nor would it be singing away.  It would just be sitting there.  Housing starts faded a touch in May, led by a sharp decline in the key single-family segment.  Multi-family activity was up double-digits, but not enough to stop the bleeding.  Three of the four regions posted declines, with only the South keeping things from looking really ugly.  On the other hand, permit requests rose a touch.  Single-family permit demand increased, but that may have due to an unusually low April level.  The May number was similar to what we saw during the first three months of the year.  Permit requests are still running above actual starts, so there is some room for construction activity to improve.  The backlog of homes to be built is thinning as the number of homes permitted but not started is falling.  If construction increases, the rise should not be that great.

Supporting the view that housing has likely entered a stable stage was yesterday’s National Association of Home Builders Housing Market Index report.  The overall index eased as all three components – present and future conditions and traffic – were down.  The Northeast and West were off sharply, but there was a rise in the Midwest and the South was flat.

MARKETS AND FED POLICY IMPLICATIONS:  As the data for this quarter mount, it appears that growth will be somewhere in the 2% range.  I have it a little lower, but given the wild revisions in the retail sales data, it is hard to know what consumers are thinking.  If the housing numbers are an indirect way of looking at household exuberance, it looks like they are shopping but not dropping.  And that may not be bad.  We have had three consecutive quarters of growth that was above sustainable levels, so if we have a fourth one that is pretty much at trend, it would be hard to say the economy is weakening.  There is a big difference between a soft economy and one that is easing back to more realistic growth rates.  That seems to be happening.   Whether Jay Powell and his band of scaredy-cats see it that way is another story.  There is no reason to change anything right now.  Indeed, now, more than ever, the term patience makes the most sense.  The fundamentals of the economy remain good.  It is the overarching political issues that are so threatening.  But as long as those threats don’t turn into reality, the economy does not need any additional help.  Since we will not know where things are going for a while, the best thing for the Fed to do is punt, that is, remain patient.  The markets are expecting the Fed to lose that term when the FOMC meeting ends tomorrow and the statement is released.  If the members don’t keep it in, it would be a mistake as they would be taking a big risk that actual second quarter growth comes out at or below expectations, not above it.  How do you square a message saying a rate cut is coming when the economy remains solid?  I don’t know.  I would argue that if the Fed signals that a cut could happen soon, it will have basically moved to a single mandate which contains neither full employment nor stable inflation, which we have.  It would be essentially saying that its purpose is to maximize markets.  When it comes to turning points, and a move to lower rates would represent one, it is the Fed’s job to lead, not follow.  That is what previous Chairs did.  They then followed the markets up or down until they decided to signal that enough was enough.  It would be a terrible change in strategy to not only allow the markets to lead during an easing or a tightening, but also to determine when the easing or tightening should stop and when it should be reversed.  That would be an abdication of the Fed’s responsibility.