KEY DATA: Starts: +3.8%; 1-Family: +2%; Year-to-Date: -0.6%; Permits: +5%; 1-Family: +3.2%; YTD: +2.4%
IN A NUTSHELL: “Housing continues to wander around aimlessly, faltering one month, rising the next but essentially going nowhere.”
WHAT IT MEANS: With the economy decelerating, we need to find some sector that will lead us back toward strong growth. Well, it doesn’t look like that will be the housing market. Yes, housing starts rose solidly in October. There was a modest increase in single-family activity and a more robust gain in the always-volatile multifamily component. But what caught my eye was the year-to-date numbers. After ten months, home construction is slightly down compared to the same period in 2018. The year started out quite slowly but it hasn’t accelerated sharply enough to overcome the early weakness. Will housing construction pick up? The data seem to argue that. Permit requests rose again and hit their highest level since May 2007. They have been running above starts for most of the year and are nearly seven percent above last year’s 10-month total. Builders just don’t spend money on permits for the fun of it. The number of homes permitted but not started is high, we should imply increasing starts going forward.
In addition, The National Association of Home Builders’ Index came out yesterday and while it edged down in November, optimism remains near the level reached in 2005, the high point in the housing bubble. Current and future sales are expected to be strong. The combination of rising permit demand and high builder confidence argue for a rise in home construction. However, I have been saying that for months and the upward trend, if there is one, has been fairly modest. MARKETS AND FED POLICY IMPLICATIONS:The economy seems to be settling into a trend level growth pattern of something in the 2% range. An improvement in home construction would help offset what is likely to be a slowdown in consumption to a more sustainable pace.The major unknown remains the trade tensions. That is affecting business confidence and therefore capital spending as well as trade flows. The trade “deal” that is being negotiated does not look like it will be much more than an attempt at placating both parties. Each will get something but it is not being billed as a major agreement and it has to be viewed that way when considering the impact on the economy. At best, conditions will move back toward where they were before the war started but it is doubtful that trade flows will reach levels we saw previously. It is, as stated, only an initial, partial deal. I am sure it will be billed as the greatest trade deal in the history of the nation, but my job is to analyze the real work impacts and from the little we know, that are not likely to be great. We should see some additional capital spending as some companies decide the worst is behind us, but given the global economic slowdown, there is little reason to expect any extended surge. In addition, that deal does nothing to the tariffs on European products. So, a partial deal might lead to higher equity prices but not necessarily move the needle much when it comes to economic growth. That said, it would bolster the Fed’s new stance that it has won the war on recession and doesn’t need to do anything unless conditions change significantly.