INDICATOR: December Housing Starts and Permits, January Philadelphia Fed Index and Weekly Jobless Claims
KEY DATA: Starts: +11.3%; Permits: -0.2%/ Philly Fed: +3.9 points/ Claims: -15,000
IN A NUTSHELL: “Today’s data reinforce the view that housing is solid, manufacturing is improving and the labor market is tightening.”
WHAT IT MEANS:
For the second day in a row, data on housing, manufacturing and the labor market were released and today’s numbers provide the exact same message as yesterday’s: All is well. Housing start surged in December, but that was not a surprise. Actually, I thought they would be up even more because the November construction pace cratered after a surprisingly huge gain in October. In other words, the data were really volatile in the fall. That said, we are back to a level of home building that is solid and reasonable. There were large increases in December in three of the four regions. Activity declined in only the South, though I cannot provide a good reason. Looking forward, permit requests eased, but they didn’t collapse in November. Over the past three months, permit request have, in total, exceeded starts. Total home construction in 2016 was up a moderate 5% from 2015. With the current level of starts still about 15% below what could be considered normal, we have a lot of room to run this year, even if mortgage rates rise.
The Philadelphia Fed’s survey of manufacturers rose solidly in January, indicating the factory sector is continuing to recover. Orders jumped and hiring picked up. Over sixty percent of the respondents indicated that demand has increased over the past six months. Confidence about the future hit its highest level in over three years. The exuberance spilled over into hiring expectations and that index was the highest in nearly forty years. That seems overdone to me.
Jobless claims surprisingly fell last week and the decline was large. I say surprisingly because the level is so low that we might have to start closing unemployment offices. Adjusting for the size of the workforce, we are at record lows, which is a clear indication that the labor market is tight and firms are doing whatever they can to retain their workers.
MARKETS AND FED POLICY IMPLICATIONS: Tomorrow is inauguration day and the markets are focusing on the change of administration. Investors are also beginning to face the simple fact that there is only so much that a new president can do on his own. They also understand that campaign rhetoric is one thing, but actual change requires actions, not just words. Yes, some regulations can be changed, but the big issues such as tax reform, the repeal and replacement of the ACA and infrastructure spending will take time. A logical wait and see attitude seems to be developing. Meanwhile, the economy continues to improve and is in good shape. As Chair Yellen indicated in a speech yesterday, the unemployment rate is at the Fed’s target level and inflation is just about there, so rates can rise gradually (whatever that means). And they will, no matter what others think. To me, the key statement in her talk at the Commonwealth Club was this: “At the Fed, we too are nonpartisan and focused squarely on the public interest. We strive to conduct our deliberations impartially and base our decisions on factual evidence and objective analysis.” In other words, rates will be increased as fast as the Fed thinks they need to be and no politician can change that. Take that comment as you wish, but to me it was a shot across the bow of the new administration that threats or promises to replace the Fed Chair will have no impact on the course of monetary policy.