NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: October Housing Starts/Weekly Unemployment Claims
KEY DATA: Starts: -0.3%; 1-Family: +3.9%; Permits: +0.9%; 1-Family: +5.1%; Unemployment Claims: 388,000
IN A NUTSHELL: “Housing is firming and some improvement may be in the cards, adding to the view that this recovery is becoming broader based.”
WHAT IT MEANS: The housing sector is a long way away from being healthy but maybe it is starting to get strong enough to move out of the ICU to the recovery room. Housing starts eased a touch in October and on the surface that does not look to be anything positive. However, there was a sharp increase in September and the modest decline indicates the sector managed to sustain that upturn. There was a nice increase in single-family activity but that was offset by a larger drop in the volatile multifamily segment. With the demand for rental housing rising, I expect the multifamily component to keep rising going forward – it just may be in fits and starts. Indeed, with permit requests jumping, improving starts numbers should be seen in the November or December data. Builders are quickly taking those permits and turning them into starts as can be seen in the further decline in the permits authorized but not started pace as well as the increase in the homes under construction rate. As for the labor market, there was a nice drop in new claims for unemployment insurance and it wasn’t just a one week wonder. These data can and do bounce around and the more stable four-week moving average fell below the critical 400,000 level, signifying the likelihood of future declines in the unemployment rate.
MARKETS AND FED POLICY IMPLICATIONS: Another day of pretty good numbers. Don’t expect housing to add lots of jobs or power the economic comeback, but it sure looks like it will be adding to growth going forward. Indeed, the Home Builders Associations confidence measure has jumped two consecutive months as developers seem to be seeing clearly improving conditions. Housing has typically been the first stage of the recovery rocket and its failure to ignite has been a key factor in the sluggish expansion. That the sector may finally be adding jobs is a positive sign. When added to the drop in the claims numbers, you can see that economic conditions are moving upward at an accelerating pace. However, and there is always a however, two major roadblocks stand in the way of solid growth: Rising oil prices and European debt issues. While a European collapse would cause the most problems, I believe that is not likely. If we get what most economists believe will be a mild to moderate European recession, the recovery will be slowed but not killed. But with oil above $100 a barrel, the prospects of $4.00 a gallon of gasoline is of major concern. Worse, the combination of a European downturn and high gasoline prices could move us back to where we were in the spring when the economy was making minimal headway. So, while I like what I see in the economic data, I recognize that we are not out of the woods by any means. That is something the Fed members are quite cognizant of and why Mr. Bernanke is so willing to stick his neck out and say he will keep rates low until mid-2013. As for investors, it remains Europe, Europe, Europe and it will stay that way for a long time.
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