Housing starts fell 3% last month, the Census Bureau reports. The retreat is the first monthly setback since July, although the drop isn't a big surprise, as I discussed earlier today, before the numbers were released. More importantly, November's red ink doesn't appear particularly troubling in terms of the outlook because it doesn't change the overall momentum profile. The annual trend in new housing construction continues to rise at a strong pace, largely because demographics and demand are again pushing homebuilding activity higher.
Even a growing market for new residential construction doesn't expand each and every month. One reason for thinking optimistically that new starts will reach higher levels in the months ahead is the ongoing increase in newly issued building permits, which increased nearly 4% in November to a four-year high.
click to enlarge
Stepping back and looking at the annual trend reveals that both permits and starts continue to advance by a healthy 20%-plus on a year-over-year basis. The November pace for this pair of indicators is at the lower end of annual increases posted in 2012, but short of a recession there's no reason to expect that the housing market's recovery is about to run off the rails.
Is a recession likely? Anything's possible, of course, but for the moment a new downturn continues to look like a low-probability event for the immediate future for at least two reasons. One, my latest GDP nowcast for the fourth quarter anticipates a rise of 1.5% for the economy overall (based on an average of five econometric forecasts). That's a considerable slowdown from Q3's 2.7% increase, although the incoming data lately have been trending higher and so the latest nowcast has turned moderately higher vs. its predecessor. As a result, it's possible that future nowcast updates for Q4 will improve further as more numbers for the current quarter arrive.
Another source of optimism is The Capital Spectator Economic Trend Index (CS-ETI), which continues to exhibit relatively low levels of recession risk, as I noted in last week's update. In fact, since running the numbers for CS-ETI on December 10, several additional data points have been published and the news is positive. Today's year-over-year increase in permits through November (a reasonably good proxy for what to expect with starts) is one upbeat report that will boost CS-ETI in a future update. Another is November's strong rebound in industrial production.
“We’re headed higher and next year is going to be the best year for housing starts that we’ve seen since 2007,” predicts Stuart Hoffman, chief economist at PNC Financial Services Group. “Housing is coming back."
Yes, the fiscal cliff factor may be a joker in the deck for macro, but I expect that a deal that softens the blow in some degree is coming. In that case, the odds will be even higher that the U.S. economy may surprise on the upside in the new year. Sure, there are still plenty of risks lurking, but the fact that the economy has muddled higher this year despite any number of hazards tells you something, namely: growth still has the upper hand.