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Former Fed Chairman Alan Greenspan, speaking last November, predicted that the worst of the housing market's correction had passed. But judging that commentary by housing starts suggests otherwise.

On Tuesday morning the government announced that the seasonally adjusted annual rate of housing starts for May dropped 2% from April. Compared to last November, starts are off nearly 6%. Looking at the data on an annual basis reveals that housing starts are almost one-quarter lower compared to a year earlier.

One might point out that the low point for starts arrived this past January, as our chart below shows. But the trend since, although technically improved since that trough, has yet to inspire confidence that a genuine recovery has arrived.

Housing Starts

It should also be noted that while housing's future trend remains a question, the larger economy has yet to suffer an associated shock of any great magnitude. Although no one will confuse June 2007 with June 2006, as optimism is still the easier sell. But make no mistake: there's still reason to worry that housing's ills aren't over, and that the virus may grow bigger as a negative for the larger economy.

"I see [the fall in housing starts in May] as further confirmation that the housing sector is going to be a drag on the U.S. economy for the rest of this year," Carl Riccadonna said Tuesday in Reuters. "There was some doubt about that a few months back, but this data show continued declines in activity."

The question is how much the drag will press on economic growth, generally. The answer is forthcoming but presently unknown. Economic growth continues until it stops. The transition from expansion to contraction is clear in hindsight, and mysterious as it unfolds in real time.

No one knows which variable might turn the trend. Meantime, we can amuse ourselves by looking at the past and consider that housing may yet tip the cycle from up to down -or not. For those who think the latter's the favored outcome, the statistic to embrace is housing permits, which the government also dutifully reported on Tuesday.

Permits are considered a superior measure of what's coming for housing, vs. the rear-view-mirror status that starts are said to suffer. As such, last month's 3% rise in single-family housing permits (at a seasonally adjusted annual pace) is encouraging. Alas, we'll need many more upticks to resolve the fact that permits in May 2007 are still 22% below the tally of the previous May.

For mere mortals, the only reaction is wait, wait for more data. Yes, we've been waiting now for months and still we've no clarity. Grin and bear it. As Iggy once sang, "I feel stuck, stuck on a pin."

Source: May Housing Starts: An Indicator of What's To Come?