INDICATOR: January Housing Starts and Producer Prices
KEY DATA: Starts: -16.0%; Permits: -5.4%/PPI: +0.2%; Food: +1.0%
IN A NUTSHELL: "The winter froze not only people, but builders and vegetables as well."
WHAT IT MEANS: And the beat down goes on, and the beat down goes on. Okay, bad lyrics but the winter weather that simply will not end has put to an end the strong growth we saw in the second half of last year. Another housing report, another indication that you can only do so much when there is snow and frozen ground. Housing starts cratered in January with demand falling everywhere but in the Northeast. In that region, a 150% jump in multi-family construction powered a large increase in overall activity. Given there were only 2,500 multi-family units started in December, it didn't take much to move the needle a lot, especially when the numbers are annualized. In the Midwest, there were a grand total of 2300 units started in January, the fewest recorded since the report was started in 1959. The only logical explanation for that was the winter weather. In other words, when you consider the weather and the data, it is hard to think they reflect anything but a very angry Mother Nature. That is confirmed by the permit numbers, which though down, are well above the starts levels. Builders slowed things down but given the rise in the number of homes permitted but not started, I expect construction to accelerate once the warmer weather sets in, if it ever does.
On the inflation front, the news was not that great. Food costs continue to surge. You can slice and dice the index all you want but people have to eat and when wholesale food costs rise, it is inevitable that retail prices follow. Energy price increases were moderate but we know that is accelerating. But even excluding food and energy, finished consumer goods costs rose strongly. On the business side, while capital goods costs rose modestly, construction expenses jumped. Looking down the road, there was also some pressure on both intermediate and crude goods, raising some questions about whether the very low consumer inflation rate will continue.
MARKETS AND FED POLICY IMPLICATIONS: Forget the housing data. It is going to be months before we have any idea what is happening in this sector, as the first two-thirds of February has been pretty bad as well. The only positive take away I have is that permit requests are holding in, suggesting a rebound in construction is likely. As for inflation, we could be facing the usual conundrum: If only food and energy costs rise sharply, should we worry about it? The answer is yes, but not necessarily because of inflation concerns. With so many household still facing financial challenges and with income gains largely nonexistent, an increase in necessity costs will likely come out of other consumption. So the rise in food and energy costs is a negative for spending and growth. Meanwhile, the Fed has to navigate without really knowing what is going on in a key sector, so the FOMC will likely continue doing what it has been doing, which is continue tapering. Investors are probably coming to grips with that reality.