By Carlos Guillen
Equity markets refuse to move lower despite rather mixed economic data which included housing permits, industrial production, and consumer sentiment.
On the housing front, December housing starts landed at a better than expected level; however, the number did decline from that reached in the prior month. Housing starts for December declined 9.8 percent month over month to 999,000, but they were above economists' expectations of 985,000. More disappointing, however, was that building permits, an indicator of future construction and a leading indicator for the economy, unexpectedly fell. Building permits fell 3 percent to an annual rate of 986,000, missing economists' estimate calling for a rise to 1.02 million (more on this below).
On perhaps a bit of positive economic data was that industrial production rose in December, signaling U.S. manufacturing was improving heading into the beginning of the year. According to the U.S. Federal Reserve, industrial production during December increased month-over-month by 0.3 percent, in line with the Street's consensus estimate. In the same time range, capacity utilization increased from 79.1 percent to 79.2 percent, landing higher than the Street's consensus estimate of 79.1 percent. Manufacturing output, the largest component of industrial production, rose 0.4 percent, marking five straight months of increases. This result seems to confirm the latest data from the Institute for Supply Management (ISM) which also showed an improvement to its Purchasing Managers' index (PMI), considered by many to be a very important health indicator of the manufacturing industry here at home.
Perhaps the most discouraging item of the day was that consumer sentiment not only landed lower than expected but also declined to start the year. The University of Michigan's Consumer Sentiment January result landed at 80.4, lower than the Street's expectation of 83.0, decreasing from the 82.5 reached in December. While consumers had been positive about the economy as they perceived an improving jobs backdrop, the most recent data point on job creation fell way below expectations, and more than one million unemployed workers lost their unemployment insurance benefits as the emergency benefits plan came to an end. Perhaps a bit less significant but still a factor in declining sentiment is the fact that gasoline prices have been creeping higher and equity markets have been hitting resistance. Hopefully this will not have a negative effect on consumer spending, which is a major component of the U.S. economy, but if income growth stalls, all bets are off.
In all, despite rather mixed economic data points, it is encouraging to see that stocks are making gains so far into the trading session and are not showing significant signs of giving up much of the gains.
Housing starts for December hit an annual rate of 999,000, down from the 1.12 million rate posted for November but still above the 985,000 consensus estimate. As you may recall, November had shown an unusual 23% month to month spike which at the time we noted was most likely an aberration due to seasonal adjustments. Likewise, this is why the consensus (and ourselves) had also been expecting a decline for December. Thus, the 9.8% decline in starts this month doesn't worry me. Encouragingly, starts still remain 11% higher than in October. It's the same case for single-family units, which were down 7% month to month but still up 11% from October. Permits for new construction were down 3% month to month, and down for a second month in a row at 986,000 units. Nevertheless, permits remained 4.6% higher year over year.
In the meantime, existing home supply remains relatively low from a historical standpoint, supporting ongoing need for home construction.