Today’s update on housing starts and new building permits is wobbly while data on industrial output looks mildly encouraging. It’s going to take time to figure out which side of this macro coin is the genuine article, but in the meantime let’s zero in on the key trends as a starting point for guesstimating how the broad trend is unfolding.
First, the bad news: housing starts suffered a sharp setback in December, totaling 999,000 — a hefty 9.8% slide from November. But keep in mind that November enjoyed a surge in new residential construction and today’s release revised that data even higher. December’s total, as a result, is up against tough competition with the previous month. Even so, December’s total number of housing starts on an annualized seasonally adjusted basis is still the fourth-highest since the Great Recession ended in mid-2009. In absolute terms, the data doesn't look that bad.
The problem is the direction of the trend. Looking at the year-over-year changes for starts suggests that the housing recovery is losing momentum. Indeed, starts were virtually flat last month vs. the year-earlier level, posting an increase of just 1.6%--the slowest pace in more than two years. Newly issued building permits — a leading indicator for starts — are also expanding at a sluggish rate that’s the slowest in several years.
Some analysts are warning that the housing recovery is history. The year-over-year comparisons for starts and permits certainly play into this prediction. The question is whether the housing sector can continue growing at a modest if unimpressive level vs. recent history? Or has the recovery truly hit a wall? We’ll know soon enough, but given the strength in other corners of the economy it’s still too early to write the obituary for housing.
For instance, consider today’s upbeat industrial production release. The Federal Reserve reports that industrial activity expanded 0.3% last month. Although that’s a sharp slowdown from November’s 1.0% gain, the annual rate of growth picked up in December. Indeed, the 3.7% year-over-year increase through last month matches October’s pace as the highest since mid-2012. In fact, most of the growth for industrial activity comes from the cyclical manufacturing sector, according to today’s data.
“Pretty clearly there’s been a pickup in manufacturing in the last couple months,” notes Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “Certainly you have to start with the consumer in the last couple of months and there’s been a pretty strong pace in goods consumption.”
Nonetheless, it’s not obvious that the housing market is headed for a strong run of growth. Perhaps next month’s housing report will tell us differently. For now, there’s a mixed bag of numbers to consider. In fact, that seems to be par for the course with key macro indicators of late. Notably, we recently saw diverging views of the labor market by way of the conflicting trends in payrolls data from ADP and the government.
It’s premature to assume the worst, but keeping confidence bubbly demands a bias for strong data in the weeks ahead. The next major set of releases arrives next Thursday (Jan. 23), with the scheduled updates on weekly jobless claims and existing home sales.