August Housing Starts, Weekly Jobless Claims and September Philadelphia Fed Manufacturing Survey

KEY DATA:  Starts: -5.1%; 1-Family: +4.1%; Permits: -0.9%; 1-Family: +6%/ Claims: -33,000/ BOS: -2.2 points; Orders: +6.5 points; Expectations: +17.8 points

IN A NUTSHELL:  “Don’t let the decline in home construction fool you, the level is still really good.”

WHAT IT MEANS: Housing has been the star of the recovery, so should we be worried about the decline in housing starts in August?  Not at all!  First, the total level is quite decent.  In addition, the key single-family segment was up again.  Multi-family construction is extremely volatile and that portion of the market fell sharply after having surged in July.  Nothing unusual with that.  The second reason you shouldn’t think this is the start of something bad is that permit requests, while falling slightly, are also at a high level.  More importantly, they are again running above starts, so construction could pick up going forward. 

Jobless claims declined last week.  That is the good news.  The bad news is that they were at 860,000, an extremely high level.  It is likely that over three million more workers will lose their jobs this month.  Another sign the labor market has a way to go before we can say it is in good shape was the total number of people receiving checks from all programs, which remained near thirty million.  New claims for the special Pandemic Unemployment Assistance (PUA) program, which covers those who were traditionally not eligible for assistance, such as small business owners, declined.  While we don’t talk about it much, there are more people receiving checks from the PUA than from the traditional program. 

Manufacturing activity in the Mid-Atlantic area eased a little in early September, but again, that is nothing to worry about.  The Philadelphia Fed’s Business Outlook Survey activity index was down only modestly.  More importantly, the components were pretty good.  Order growth improved, shipments surged, backlogs started to build and employment growth accelerated.  Maybe impressive was the surge in optimism.  Indeed, the level of the expectations index is so high that it seems to indicate that respondents were nearing the exuberant stage.        

IMPLICATIONS:  Housing is fine but the unevenness in the recovery continues.  There are big winners and losers and while the overall economy is getting better, the labor market remains in a state of churn.  You cannot say that conditions are getting a lot better when nearly thirty million people remain on government income support and over three million workers a month are losing their jobs.  The longer this continues, the more the friction in the labor market is likely to keep those losing jobs from readily finding new ones.  Thus, while we have seen a rapid decline in the unemployment rate, that may slow, possibly sharply.  The low hanging fruit for unemployed workers, a return to their old jobs, is beginning to disappear and new/different jobs may be hard to find.  The good news is that the reopening also has a long way to go, so job gains and lower unemployment rates should be the story for the next few months.  As for investors, the bigger story could be comments made by CDC Director Redfield that a vaccine might not be widely available until the second or third quarter of next year.  While the president may be saying he made a mistake, that comment really cannot be walked back. It implies that it could be another nine months or more before we see large-scale vaccination in this country.  The economy will not get back to whatever the “next normal” will be until that happens. While investors may not be assuming a vaccine will be ready by Election Day, they may not be factoring in an extended period before it is.