INDICATOR: April Housing Starts and Permits
KEY DATA: Starts: up 13.2%; 1-Family: up 0.8%; Permits: up 8%; 1-Family: up 0.3%
IN A NUTSHELL: "We have been looking for signs that the winter weather was the cause of the economic discontent and the sharp increase in home construction seems to argue that was the case."
WHAT IT MEANS: What Mother Nature takes away with bad weather, she can give back once the warm weather returns and that may be happening. The faltering housing sector seemed to get a major burst of energy as housing starts skyrocketed in April. Okay, most of the increase was in the very volatile multi-family segment. However, just as you cannot discount the decline in the unemployment rate because of the fall in the labor force participation rate, you cannot pooh-pooh the rise in starts because it was in larger buildings. The share of total starts that are one-family hit its peak of 87.5% in 1993, as boomers started buying homes like crazy. By 2013, the share was down to 67.8% and it has fallen further this year. That makes sense as boomers are moving into condos and millenials are piling into rental units. Don’t expect that pattern to change for a while. Also, starts had been lagging permits and that is no longer the case. There is still a growing number of permitted but not constructed units and that implies further increases in starts going forward. As for where builders are building again, it should surprise no one that the biggest gains were in the winter-weather-constrained Northeast and Midwest.
MARKETS AND FED POLICY IMPLICATIONS: Was the flat lining of growth in the first quarter a weather-driven anomaly or an indication the economy is faltering again? That has been the question on everyone’s mind, especially Janet Yellen’s. The economic data so far this quarter have been a little more mixed than expected. In April, manufacturing output softened after two strong months and retail sales were less than stellar. Yet unemployment claims are closing in on all-time lows, especially when adjusted for labor force size, job growth was robust, the unemployment rate is falling and now we see that construction is picking up. So, was it weather or a slowdown? We probably need another month to really have a good feel for the answer but I am still on the side of weather being the major factor in the weak first quarter. The Fed will have a lot of new data when the FOMC meets on June 17-18 and I suspect they will be strong enough that the tapering will continue and some thoughts about rate hikes will be provided. That would be the case if we get another Consumer Price Index report like yesterday’s, which pointed to accelerating inflation. Prices are not rising rapidly, but they are closing in on the Fed’s target level. As for investors, who knows what is driving decisions right now. Maybe it is acrophobia, which actually might be a rational fear, as the markets have gotten really high.