US housing starts dropped by a more-than-expected 8.5% last month, the Census Bureau reports. Meanwhile, newly issued building permits gained 1.8% over December's total, at a seasonally adjusted annual rate. More importantly, both series continue to advance at 20%-plus levels on a year-over-year basis. That's a strong signal for thinking that housing recovery remains intact.
The month-to-month data will, of course, tell us differently at times. As usual, however, it's best not to focus too closely on the short-term figures, which are prone to various distortions.
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For purposes of discerning the big-picture trend for the business cycle, the annual pace is considerably more reliable for housing and other economic numbers. By that standard, today's housing construction and permit data deliver another round of upbeat news. Permits, which are included in The Capital Spectator Economic Trend and Momentum indices, enter the January column firmly in the black. As a result, last month's economic profile looks a bit brighter, and recession risk a bit lower, as far as this year's first month is concerned.
The revival in housing construction, in short, rolls on. That said, the 20%-plus year-over-year pace for both starts and permits is unsustainable. The gains we've seen for much of the past year are partly a function of a rebound from a low base. The recent monthly annualized rate of 800,000 to 900,000 starts a month is roughly half as much as the pre-recession level. Granted, the pre-recession level was over the top, as we now know. In any case, we're surely headed for a lower pace of growth.
But growth still looks like a reasonable forecast. One clue: permits forged higher again last month, and currently exceed starts. That’s a convincing leading indicator for expecting residential construction will soon follow in the months ahead.
For the near term, something on the order of 10%-15% growth looks reasonable and sustainable. That assumption implies that we'll see more monthly decreases in 2013 in the transition from high rates of annual increases to moderate increases. Nonetheless, a housing market that's still growing at a moderate pace is a considerable plus for the economy overall.
According to the National Association of Home Builders, housing's contribution to GDP ranges somewhere between one-tenth and one-fifth through time. The fact that it's contributing at all in a positive way is major shift from recent history.