July Housing Starts and Permits/Productivity and Labor Costs

Joel L. Naroff
President and Chief Economist

INDICATOR: July Housing Starts and Permits/Productivity and Labor Costs

KEY DATA: Starts: +5.9%; 1-Family: -2.2%; Permits: +2.7%; 1-Family: -1.9%/Productivity: +0.9%; Labor Costs: +1.4%

IN A NUTSHELL: “Housing continues to improve but weak productivity gains raise questions about future earnings growth.”

WHAT IT MEANS: So far, so good.  The jump in mortgage rates has raised questions about the sustainability of the housing market but any major negative impact has not been seen so far.  Housing starts jumped in July though all the gain came in multi-family construction.  The single-family segment softened. While there is a clear transition into condos and apartments occurring, the fall off in single-family construction to the lowest pace since November 2012 may be the first sign that some trouble is brewing.  But even that is uncertain. The National Association of Home Builders reported that builder confidence continued to rise and with permits increasing, we are likely to see additional construction in the months ahead.

While the housing sector is still solid, other data point to questions about the manufacturing sector.  Yesterday we saw that manufacturing production faded in July.  Today we got the second quarter productivity numbers and while there was a rise, they were hardly strong. The gain in the second quarter was a lot better than the large decline posted in the first but over the year, nonfarm productivity was flat.  At the same time, unit labor costs are rising.  Slow productivity and rising compensation costs don’t bode well for earnings growth.

MARKETS AND FED POLICY IMPLICATIONS: We still need to wait a couple of months to determine if what we are seeing in the housing market is a result of people acting before rates go even higher or a fundamental strength in housing.  I am just not sure. Undoubtedly, if rates rise further, as they have been on expectations that tapering will begin sooner rather than later, we will get a burst of activity and then a fall off.  That is important because some Fed members seem to be driven by headline data rather than details.  But if there are members concerned about the economy, they should take note of the productivity data.  Weak productivity gains and an unwillingness to hire don’t make for strong growth in the economy.  And if the chain store sales are any indication, the malls are no longer the in-place to be.  Third quarter growth is likely to exceed two percent but not by much and given that growth in the year ending in June was only 1.4%, it is hard to see how anyone could say the economy is healthy enough to stand on its own. Worse, it looks like all the impacts of the start of tapering are not in the market.  The ten-year note has increased 20 basis points this week and once the Fed actually begins to taper, investors will start betting on the speed of the reduction.  The Fed has lost whatever control of the long end that they had and that has some real implications for mortgage rates, the housing market and growth. Don’t you love “clear communications”?

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