KEY DATA: Starts: +0.2%; 1-Family: +12.8%; Multi-Family: -17%; Permits: -16.3%; 1-Family: -1.9%; Multi-Family: -31.8%

IN A NUTSHELL: “Housing continues to steadily improve, reinforcing the view that the economy is in good shape.”

WHAT IT MEANS: The housing market is a leading light of the economy and it looks like that will be the case for a while. Home construction edged up in July to a level not seen since the fall of 2007. Single-family activity also returned to late 2007 levels. While those may not be quite where we would like them to be, the steady progress in a sign that this housing recovery is not being hyped by artificial factors. There was a major fall-off in multi-family construction but this is a very volatile segment of the market. Looking forward, the rise in starts should be sustained, though don’t look for a huge increase. Permit requests tanked in July but that came after a spike in June. Over the past three months, permit requests have been running over 6% faster than starts, so even with the July decline in permit purchases, builders have to get going if they are to use up all the permits they have stashed away.

Adding to the expectation that housing will add to growth in the future was yesterday’s report by the National Association of Homebuilders that their index of builder optimism hit its highest level since November 2005. Builders are confident about the future and they are backing that up by actually doing what they are supposed to do: Build!

MARKETS AND FED POLICY IMPLICATIONS: For the most part, the recent data have been pointing to solid growth this quarter. Yes, yesterday’s Empire State Manufacturing Index did tank, but it is hard to understand how confidence could rise but activity collapse. We have had some bizarre moves in the confidence reports lately and I am not sure why. Consumer optimism tanked in July, if you believe the Conference Board, but why people suddenly started feeling sullen is anyone’s guess. Some regional manufacturing indices fell, yet industrial production surged. So you tell me what is going on with that data and we will both know. My take is the economy is moving forward solidly. We may not get two growth rates above 4% as we did last year, but second half growth should exceed 3%. That would mean solid job gains and decline in the unemployment to 5% or less by the end of the year. In other words, the economic numbers should support a Fed rate hike. The FOMC is not likely to change its timing because of the strong dollar. Yes, every company that reports weak earnings is blaming the dollar, but that is a foreign earnings issue, not a domestic economic problem. There is no reason to change policy because of a currency translation issue. Once we get the August jobs report, the Fed members will have to get serious with their signals about a September rate hike. As for the markets, oil prices and the dollar, rather than fundamental economic data, seem to be driving daily action. But over the remainder of the year, investors should not fear the Fed. A rate hike would signal that even this group of worrywarts thinks the economy is in good shape and that would send a strong, positive message. But as I like to say, markets are efficient but not necessarily rational.