INDICATOR: May Housing Starts and Permits
KEY DATA: Starts: up 6.8%; Year-to-Date: up 28.1%; Permits: down 3.2%
IN A NUTSHELL: "With builder confidence jumping, home construction should continue to improve despite the recent increase in mortgage rates."
WHAT IT MEANS: Housing continues to be the leader of the pack (vroom, vroom). Housing starts increased solidly in May. The notoriously volatile multi-family segment rebounded sharply from a huge decline in April. To put that into numbers, there was a 32% drop in April followed by a 22% rise in May. Get the picture? That is not to say there aren't some big changes in the single-family segment as well but large apartment/condo buildings don't get started willy-nilly. Regionally, the gains were not particularly well distributed. Construction moderated in the Northeast and Midwest but improved in the South and Midwest. Looking forward, home building is likely to jump over the next few months. Yes, permit requests fell in May but for the past two months, permits are running about nine percent above actual building levels. That means the number of home permitted but not started is rising and since homebuilders are not paying out the money for permits for fun, they should be using them soon. Indeed, yesterday the June National Association of Home Builders/Wells Fargo Home Builder Index was released and for the first time in seven years, more respondents indicated conditions are good rather than poor. This surge in positive outlook is being driven by more traffic and the expectation that sales will be stronger going forward. That can only mean those unused permits will turn into new homes pretty soon.
MARKETS AND FED POLICY IMPLICATIONS: There is some concern that rising mortgage rates could hurt the housing market. It is too soon to get any good indication of the impact but the increase has been modest and the level remains extremely low so I don't think there will be much of an effect. Indeed, developers have turned bullish and that is about as good news as we can get. Second quarter home construction is running quite a bit below first quarter averages so it is not clear yet how residential investment will affect spring economic growth, but it might not be a positive. Since this component has added about 0.30-percentage point to growth, it raises a concern that we could see a disappointing second quarter number. That said, housing is still in good shape and the "weakness" may only be due to better than normal winter weather hyping the first quarter numbers. I expect housing starts to keep rising all through the summer and indeed the rest of the year. That may make third quarter growth higher than currently forecasted. The FOMC is meeting today and tomorrow and a soft second quarter growth forecast on the part of the staff could bias the statement toward caution. I don't believe the Fed will declare the slow growth economy a thing of the past so the pedal can be eased off the metal. And with inflation remaining tame, there is little reason to argue anything else.