INDICATOR: September Housing Starts and Permits
KEY DATA: Starts: -9%; 1-Family: +8.1%; Permits: +6.3%; 1-Family: +0.4%
IN A NUTSHELL: “Home construction is in decent shape, despite the volatility in the multi-family segment.”
WHAT IT MEANS: At the end of next week, we get the first guess, excuse me, estimate, of third quarter growth, so it is important to see what the current data are telling us. One sector that had been expected to add to growth was residential construction. Weakness in the key single-family segment had dragged down activity in the spring and residential investment reduced GDP growth by 0.3 percentage point. While it doesn’t look as if housing added much over the summer, the restraint may be minimal. Housing starts did drop sharply in September, but as usual, it’s all about the details. Single-family construction surged to its third highest pace in nine years. Strong increases were posted in all regions except the West. However, the multi-family segment cratered, declining nearly 30%. The biggest issue was the Northeast, where multi-family construction was off nearly 70%. This is a relatively small region when it comes to total starts and a few large projects can skew the data. A similar large decline was seen in February, but it totally unwound in March. That is likely to happen going forward. In other words, don’t take the starts data at face value. Understand the details.
Looking forward, permit requests, which had been running behind starts, played catch up in September as they rose solidly. For the quarter, there is a now a backlog of permits and we know that firms are now taking out permits only when they expect to begin construction in the near future. Thus, look for a rebound in construction in October, but maybe not a huge one. The number of home under construction is at the highest level in nearly nine years.
MARKETS AND FED POLICY IMPLICATIONS: If you skip the headline number, the housing report was a fairly good one. Activity is growing in the key single-family segment and permit requests are strong. That points to more homes being built going forward. And it also reminds us that data are volatile and one month of strange numbers can create oddities even in quarterly reports, such as GDP. A weird pattern in starts due to weather, a surge in vehicle sales because of incentives, a rise in inventories because a dock strike ends or whatever, can create large increases or decreases in overall growth rates. That is also a problem for the Fed. When you base decisions on incoming data and those numbers are volatile and can be revised significantly, you are really flying without a gyroscope. Good luck with that. Meanwhile, investors will continue to follow oil prices and earnings releases, which look pretty good so far. There are still lots of numbers that will be released before the election, including third quarter GDP and October payrolls, but who knows if anyone will be listening. One thing we do know, no matter what they look like, they will be spun into something that bears no resemblance to reality.