KEY DATA:  Starts: +6.3%; 1-Family: +6.3%; Permits: -5.1%; 1-Family: -6.3%/ Phil. Fed (NonMan.): -6.5 points; Orders: +4.4 points

IN A NUTSHELL: “Home construction remains strong, mirroring the economy.”

WHAT IT MEANS:  This week, there are few economic reports and most center on housing.  It looks like the home building sector remains in good shape.  Yesterday we saw that the National Association of Home Builders’ index eased back slightly in July as traffic slowed.  But the outlook for sales over the next six months improved.  Today’s report on June housing starts and permits was solid, as new construction activity picked up sharply.  The gain was evenly distributed between single-family and multi-family projects.  However, permit requests declined.  That is not a great issue as permits were above starts for the previous fifteen months.  Builders have a backlog of permits to work off and they are starting to do that.  You can see that in the number of units under construction, which hit its highest level in fifteen years. 

The Philadelphia Fed’s July survey of nonmanufacturing firms fell, but as is often the case, the headline number doesn’t tell the story.  First, the level remains high.  But more importantly, demand and hiring picked up.  Also, compensation costs are accelerating, and firms are raising prices more rapidly.  The issue of labor costs was the focus of this month’s special questions.  Over forty-four percent of the respondents indicated that they were raising wages more than planned and the median wage increase is now expected to be between three and four percent.  Expected wage, health and nonhealthy benefit costs are projected to rise by four to five percent.  This must be putting pressure on earnings.IMPLICATIONS:  Today, the economic data are not the major focus of investors.  Yesterday’s sell off is, and from the look of things, it is being matched by a sharp rise.  The wild gyrations in equity prices are indications investors are skittish about where we are going – and there is good reason for that to be the case. The Delta variant has taken over and it is spreading rapidly.  At the same time, vaccinations are falling and there is now a growing and vocal anti-vaccination movement.  Last summer, there was a lull, only to be met by a massive rise in the winter.  It is unclear what will happen as we move out of the warm weather into the cold.  Shutdowns are not expected, but health concerns, especially for children, could become an issue.Adding to uncertainty is the looming reduction in stimulus funds.  Over the past year, investors have looked past most of the problems and they were rewarded.  The big difference between now and last summer is that the stimulus was adding massively to both household and business spending and the prospect was that it would continue.  That is not the case now.  That said, President Biden’s first budget is filled with new spending and that could offset the loss of the stimulus funds.  Consequently, investors have reason to be uncertain, but also hopeful.  That points to further volatility ahead, so fasten your seat belts.