August Housing Starts and Permits and September Philadelphia Fed NonManufacturing Survey

KEY DATA: Starts: +3.9%; 1-Family: -2.8%; Permits: +6%; 1-Family: +0.6%/ Phila. Fed (NonMan.): -29.5 points; Expectations: -26.8 points

IN A NUTSHELL: “The housing market’s summer construction slump, if there really ever was one, may be over.”

WHAT IT MEANS: While housing prices have been soaring, home construction has been on a major roller coaster ride. Over the first eight months of the year, four times there were declines in housing starts and four months they were up. When you put it all together, so far this year, starts have soared by 21.5% compared to the same period in 2020. In August, they rebounded solidly from the large decline posted in July. The level is high, but largely sustainable. With permit requests continuing to run well above actual construction, we should see the building pace accelerate over the next few months. While starts this year have greatly exceeded last year’s pace, permit requests jumped even more, 25.7%.

The Philadelphia Federal Reserve’s reading of nonmanufacturing activity in the mid-Atlantic region took a nosedive in early September. However, just about every component continued to show that activity is improving. It’s just that the rate of growth slowed. One area where things did improve was hiring. More firms added both full-time and part-time workers. Price pressures remained extremely high, with input costs increasing faster. Firms continued to push through price increases to offset their rising expenses. Looking forward, confidence seems to be flagging, at least a little. The index fell sharply, but over fifty percent of the respondents continue to believe conditions will improve. However, there was a jump in the share that worry that the economy could slow over the next six months.

IMPLICATIONS: Housing construction has been robust, it’s just that it is doing that in fits and starts (pun intended). Given the demand for homes and the paucity of supply, look for the housing sector to add to growth in the third quarter. With retail sales also on the rise, it looks like third quarter growth will be quite strong. So, why are the markets in a tizzy? Sometimes what happens in China doesn’t stay in China. Fears of a meltdown of Evergrande, a huge Chinese developer, brought out concerns that another financial crisis could be coming. One commentator even called it “China’s Lehman Brothers moment”. Yikes. But it isn’t just China. As much as people complain about too much government spending, fears are that gridlock in Congress could cause there to be too little government spending. Let’s not forget that government funds kept millions of small, medium and large businesses from failing and supported millions of unemployed workers and their families. That money is beginning to disappear, and the economy will have to stand on its own. Investors don’t seem that confident the private-sector legs will not be wobbly. Then there is the periodic Congressional brain freeze over the debt limit, or more precisely raising it. I have a suggestion, just let the country default and see what then happens. No don’t. This is just a dumb political game and as I and most other economists have argued for years, simply get rid of the debt limit. Heck, Congress created the mess by passing the spending bills, so pay for them. Finally, there is the not-so-surprising possibility that the investors may be simply taking stock of the fact that prices have soared. A pull back could be nothing more than normal rethinking of things after such as large increase. Ultimately, the economy will prevail and there is little reason to think growth will crater. Slowdown? Of course. Growth at recent levels is just not sustainable, when you consider that roughly two percent is trend growth. The markets need a psychological reset, where anything 2.5% or above is viewed as solid, strong, or even robust, which where it is right now.