KEY DATA: Starts: -1.6%; Over-Year: +7.4%; Permits: -7.7%; Over-Year: 0%
IN A NUTSHELL: “Home construction is slowing, but not for a lack of demand.”
WHAT IT MEANS: The labor and goods shortages are having negative impacts across the economy and the housing sector is one place where the effects are significant. Housing starts were down in September, though the level is not that bad. Actually, they were pretty close to the where they were in February 2020 and are well above last September’s pace. The problem appears to be in the single-family segment, which has largely flatlined over the past few months. Yesterday, we saw that the National Association of Home Builders’ Index rebounded, led by strong current sales. Traffic was also up and so was expectations of future sales, so the issue isn’t demand. As for the multi-family component, starts may have fallen in September but they were still up almost 40% since last September. Looking forward, builders are starting to get permit requests more in line with construction activity. They had been running well above starts and without the means to use the permits, there appears to be less appetite to pay for them.
IMPLICATIONS:In an economy that is supply restricted, it is important to look at the data in a somewhat different light than you would in either a normal or demand limited environment.If you cannot build it, they don’t come and right now, builders are finding it difficult to get enough inputs and labor to do that.So, home construction is fading, restricting sales. The paucity of existing homes on the market is limited housing purchases in that segment of the economy. If you would look at sales and construction, you would think the housing sector is faltering. That is clearly not the case as builders are optimistic and homes continue to sell quickly, and frequently at above asking price. The point is that the economic “slowdown” we are in has not been created by typical factors, such as the Fed jamming on the brakes, or a crisis of one kind or another that leads to layoffs and falling income. Instead, job and income growth are strong. Since it is not due to a lack of demand, fiscal and monetary policy are largely impotent to deal with the situation. It is a supply constrained economy where fixing the constraint, the broken global supply chain, is the only thing that will change the situation. That said, the economy continues to expand solidly. Economists are downgrading their third quarter GDP estimates and will likely do the same for fourth quarter. But the pace of growth being forecasted remains well above trend growth of roughly 2%. The latest Blue Chip Economic Indicators’ consensus is for 3.6% growth in the third quarter and a robust 5.3% in the fourth quarter. There is no reason to say the economy is in trouble, is weakening or is stagnating.