December Housing Starts and Permits, Industrial Production and November Job Openings

KEY DATA:  Starts: +16.9%; 1-Family: +11.2%; Permits: -3.9%; 1-Family: -0.5%/ IP: -0.3%; Manufacturing: +0.2%/ Openings: -561,000; Hires: +39,000

IN A NUTSHELL:  “The surge in home construction was an eye-opener, but outsized gains are usually aberrations so don’t get too excited.”

WHAT IT MEANS:  Wow, what a housing number.  At least that was the initial reaction to the huge rise in housing starts.  Indeed, the level of activity reached a thirteen-year high.  Gains were not just in the volatile multi-family segment, which posted a nearly thirty percent rise, but they were in single-family as well.  The increases were spread across the entire nation and the only negative was a decline in single-family construction in the West.  On other hand, permit requests dropped.  They were down in the Northeast and the South but improved somewhat modestly in the Midwest and West.  When you see this type of outsized rise, the initial reaction is to think that conditions may be changing.  But the reality is that huge, unexpected increases are typically created by temporary factors.  December’s weather was warmer than usual with close to average precipitation.  Last December, the opposite was the case as temperatures were well below average and precipitation was above average.  There was likely a solid increase in construction, but much of the rise may have been due to seasonal factors.  We will know better when the January numbers come out, which I expect to be awful, so don’t rush to judgment about the housing recovery just yet.

While industrial production declined in December, largely due to the warm weather cutting utility output, manufacturing activity increased.  Despite the end of the GM strike, which aided the November numbers, the vehicle segment was still quite soft.  Assemblies were down sharply in December.  The good news was that computer, electronic and electrical equipment production is picking up steam.  Still, the outlook is uncertain.  Vehicle sales are slowly declining and Boeing is shutting it 737Max line and together, those negative as likely to lead to some pretty bleak manufacturing numbers in the first part of this year.

Job openings continue to fade, even as hiring remains solid.  Compared to November 2018, available positions were off by over eight hundred thousand.  The level was the lowest in nearly two years.  That said, there are still an awful lot of unfilled jobs waiting to be filled.  As for hiring, it has become more volatile and the trend is flattening out.  MARKETS AND FED POLICY IMPLICATIONS:The data for the final month of the year are flowing in and they are about as mixed as you can get. Yesterday’s December retail sales numbers were okay, but nothing special.  They indicated that fourth quarter consumption is not likely to be significantly below what we saw in the third quarter, which is good given that vehicle demand faded at the end of last year.  Today’s data muddy the waters a bit.  The shockingly large rise in home construction is likely to provide an unexpected boost to growth.As for the manufacturing sector, production was off compared to the third quarter.  But offsetting that could be a narrowing in the trade deficit.So, when you put things together, it looks like fourth quarter growth is coming in around 2%.  However, the first quarter of 2020 it might be a lot softer.  Decelerating wage gains and Boeing’s cut backs could restrain growth sharply.  While the phase one trade agreement might provide some temporary help to the agricultural sector, it is not clear when the additional sales will occur.  Which means that growth is likely to be at a pace that the Fed will be holding rates low for quite a while.  As for investors, sub-2% growth should be a red flag, but I have yet to see much that sways the markets from its seemingly never-ending upward drive.Economic fundamentals should matter, but I will believe that when I see it.