July Housing Starts and Permits/Productivity and Labor Costs

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
215-497-9050
joel@naroffeconomics.com

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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July Housing Starts and Permits/Unemployment Claims

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff
President and Chief Economist

INDICATOR: July Housing Starts and Permits/Unemployment Claims

KEY DATA: Starts: -1.1%; Permits: +6.8%/Unemployment Claims: 366,000 (up 2,000)

IN A NUTSHELL: “The housing market is continuing to heal and should be a major part of growth in the quarters ahead.”

WHAT IT MEANS: The housing market is continuing its comeback. Yes, there was a small drop in the number of homes started in July but that does not worry me at all. These data do bounce around and the total number of houses under construction continues to rise. Critically, given the strong increase in permits, the likelihood is that builders will be digging a lot more homes in the months to come. Developers are taking out permits only if they expect to put the shovel into the ground in the immediate future. They are not doing a whole lot of speculation. As for the new construction activity, there was a decline in single-family construction that was almost offset by a jump in multi-family activity. With permit requests for single-family houses rising sharply in July, look for a rebound in this segment of the market. Rising rents and the difficulties in buying homes makes it clear that the multi-family market will be strong for a long time. Regionally, construction picked up was the Midwest but the rest of the nation posted modest to moderate declines. There was one warning sing in the data: The number of homes completed is increasing and sales will have to pick up to keep inventories from growing.

In a separate report, weekly unemployment claims edged up. However, the rise was minimal and much more importantly, the level is consistent with job gains of at least 150,000 to 175,000. We should also see the unemployment rate start declining.

MARKETS AND FED POLICY IMPLICATIONS: This was another good day for economic data as the starts and claims numbers point to improvement in housing and the labor market. Housing is now adding to growth and it looks like it will continue to do that going forward. Of course, we still have a long way to go before the sector gets back to normal as starts need to double before construction is anywhere near what it should be. But that also means there is a lot of growth that could come from housing. As housing improves, construction payrolls will rise and that would add to the belief that the moderate 163,000 payroll rise posted in July will be replicated if not exceeded in the months to come. When you consider that Washington is doing everything possible to destroy confidence, housing and finance are healing but only slowly, Europe is in recession with the monetary authorities continuing to talk big but carry a small stick and Asia is probably in worse shape than the official numbers indicates, it is a wonder that U.S. growth is as good as it is. Imagine what would be the situation if all those hurdles were cleared. That is the way investors will likely read the economic tea leaves.

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RE/MAX Connection Realtors, 1000 Lincoln Drive East, Suite Two, Marlton, NJ 08053 www.goconnectionnj.com

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