KEY DATA: Starts: -3.6%; 1-Family: -5.9%; Permits: +9.2%; 1-Family: +6.4%/ PPI: +0.5%; Goods: +0.1%; Services: +0.7%
IN A NUTSHELL: “The strength in housing is a positive sign but let’s wait until the spring to see if it is real or weather-related.”
WHAT IT MEANS: Housing had been improving at a nice, steady pace for a number of years but it suddenly broke out at the end of last year. The January numbers seem to be supporting that stronger performance as housing starts fell relatively modestly. There was a huge jump in December that was expected to be unwound by a sharp decline in January, but that was not quite the case. To put things in perspective, construction activity was up by 21.6% over the January 2019 rate despite the decline. That shows how out of control things are. But there is an explanation: Warm weather. Let’s wait until the spring, when new home starts would normally jump, before getting too pumped up about a potential home construction boom. As for the details, there was a sharp decline in the Midwest, a moderate drop in the South and modest increases in the Northeast and West. Looking forward, permit requests were up solidly across the entire nation. The level was the highest in nearly thirteen years. Given the really warm weather in February, we could see another pop in starts when we get the February data.
On the inflation front, producer prices jumped in January, led by a surge in services costs. These include trade services (wholesalers and retailers) as well as hotels and financial services. Energy and transportation prices were down. On the goods side, besides energy, the pressures tended to be on the downside, with most components reporting declines. Food costs were up moderately. Looking outward, the coronavirus is slowing world demand and commodity prices are falling as a consequence. Thus, expect wholesale costs to be soft as long as the epidemic persists.
MARKETS AND FED POLICY IMPLICATIONS: It looks like housing will form a base for growth in the first quarter. But if, as I suspect, most of that increase was due to unseasonably warm weather, payback could be substantial in the spring. I expect GDP to expand by somewhere between 1.5% and 1.75% this quarter even with a strong housing sector but if it makes it back to 2%, then we are likely looking at a really weak second quarter. Indeed, the impacts from the coronavirus are likely to ramp up over the next few months as it will take time for China to ramp back up its manufacturing sector, when it actually can do that. Supply chains have been disrupted and companies around the world are slowing production and sales due to the lack of supplies. Industrial production is likely to be pretty weak across the globe and while the equity market investors may not realize it, what happens everywhere else actually does affect what happens here. We don’t know how long this will last but the longer this goes on, the broader and deeper the effects. The energy sector is retrenching and the last time that happened investment cratered and U.S. growth decelerated sharply. We are not facing the same price collapse, but business investment has been weak and cut backs in the energy sector cannot help. Thus, the first half of this year is setting up to be soft and if the epidemic lasts through the spring, don’t be surprised if there is a flat or even negative second quarter.