KEY DATA: Starts: -18.7%; 1-Family: -4.1%; Multi-Family: -45%; Permits: -4.7%; 1-Family: +0.5%; Multi-Family: -12.3%

IN A NUTSHELL: “Despite the sharp slowdown in multi-family construction, the housing sector remains in good shape.”

WHAT IT MEANS: When it comes to the headline number of an economic report, what we often have is a failure to communicate. That is the case with today’s home construction release. If you looked at the huge drop in housing starts and the declines across every region, you would think the sector cratered. It didn’t. What happened was the incredibly volatile multi-family sector data did what they sometimes do, which is fall (or rise) enormously. There was a nearly 50% drop in multi-family starts in November, driven by an 81% decline in the Northeast. Really? 81%? The huge national cut back came after a 75% increase in October, which followed a nearly 40% drop in September. Get the picture? Good. Smoothing out the data, for the first two months of the quarter, starts are over 6% above the third quarter rate. That implies housing could add sharply to growth in the fourth quarter. On the permit side, there was a little more stability. More importantly, permit requests for the past two months are still above starts. Also, the number of homes permitted but not started continues to rise, so there is some room for construction to accelerate.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC made its annual move this week and will not get back together again until the end of January. Unless something strange happens before then, the members will probably go back into to their usual turtle position. But that could change fairly quickly, if Congress and the new President get their act together and pass a stimulus bill. The size of that program will likely determine the Fed’s aggressiveness not only next year but in 2018 as well, when the full impacts of any tax cuts and spending increases will kick in. In November, for the first time since mid-2014, oil and gasoline prices posted an increase from the year before. It is unclear if the recent production reduction agreement will hold, but at least for a while, energy will be adding to rather than subtracting sharply from inflation. That is likely to push inflation above the Fed’s target and keep it there. If there is a significant stimulus bill, by the end of 2017, inflation could be running closer to 3% than 2%. In other words, unless the economic data tank in the next few months, and that doesn’t look likely, the markets will be focusing on and guessing about tax cuts, spending increases and regulation changes. Given that it is easier to say you are going to cut regulations than actually cut regulations, next year should be all about tax cuts and spending. (Obamacare changes, if they actually occur, are well into the future.) And since those actions greatly increase budget deficits, the most important thing may be the political calculations of the Tea Party member. Do they vote for major increases in the deficit in order to get tax cuts, or do they stick to their smaller government, smaller deficit mantra? Oh, and does anyone know what will happen to sequestration? Should be a fascinating few months and if you can tell me what will happen, we will both know and I can actually fill out my many economic forecast surveys.