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"The Most Bullish Development On The Entire
Globe" - this was the always bullish Joe Weisenthal's
headline this morning following the release of the New Home
Starts and Building Permits data this morning. "
It's hard
to think of a bigger bullish trend right now, at least in
the short term," he stated.
That is indeed a very bullish statement about a sector of
the economy that is still running at very recessionary
levels of activity. However, the reports for September
showed that on a seasonally adjusted basis new home starts
surged to 872,000, a 15% gain for the month, and a rise of
34.8% from a year-ago. While it was once again the
multifamily component which jumped 25.1%, the single-family
component also improved, gaining 11.0%. Housing permits also
jumped 11.6% in September to an annualized pace of 894,000
which was up 45.1% from a year-ago. This is good news,
however, it is not quite worth the euphoria that Mr.
Weisenthal attributes to the report. However, I have never
known Mr. Weisenthal to be anything BUT exceptionally
bullish. An in the famous words of Jerry Seinfeld: "There
is nothing wrong with that."
However, let's analyze the data beyond the
headline to determine what is really occurring.
As we have discussed so many times in the past, it is not
the monthly data point that matters but rather the trend of
the data that is much more important. The chart below shows
new housing starts and permits. Clearly, while the data has
ticked up in recent months, we are still a very long way
from calling it a recovery.
Secondly, the seasonal adjustments, as we saw with the retail sales, were exceptionally large
in September. The series is highly volatile to begin with so
seasonal adjustments are used to smooth the data. However,
in the most recent month, the seasonal adjustment was larger
than normal and the entire trend has been diverging from
historical norms. The chart below shows the Seasonal versus
Non-Seasonal Housing Starts data going back to the peak of
2006. Just for the record the number of new home starts in
September, on a non-seasonally adjusted basis, was 79,000 up
from 70,100 in August.
Housing starts tend to peak around June of each year and
then trail lower through the end of the year. More
importantly, the seasonal adjustment in September is
normally lower than, or roughly equal to, the June
adjustment. That is until the last two years of the "housing
recovery" where the seasonal adjustments have been
pushing the data higher. The seasonal adjustment
for September, on a percentage change basis from August,
was the largest on record at 15.28% going back to 1959.
While it should be expected that by now we should be seeing
some pickup in housing - the majority of the activity is
still occurring in the lower end of the price spectrum. The
problem going forward remains the economy.
The underlying fundamentals, especially in the 25-35
cohorts, are simply not in place to create a sustainable
upturn in housing. This is particularly the case as consumer
liquidity remains severely impaired by high unemployment,
stagnant wages and negative real income growth. Furthermore,
there is a disconnect between new home starts and
real-estate related loan activity at commercial banks. The
change in lending from August to September was up a mere
0.2% and is only up 1.6% from a year ago.
Of course, that data represents all real-estate related
lending and covers both existing and new homes, however, the
level of activity is still well shy of something that would
support such a rampant increase in the latest month's data.
Furthermore, when it comes to new home sales in particular,
there are many exogenous related factors that can skew the
data in the short term such as requirements on builders to
maintain lines of credit, unusual weather patterns as we saw
at the end of 2011, shifts in lending requirements, over
anticipation of demand by builders which leads to excessive
spec-home building and contractual requirements on
developers.
One of the areas that we would expect to have seen increase
sharply at this point would be residential construction
workers. The mainstream media has been touting the housing
recovery for well over a year now yet residential
construction has remained stagnant.
The disconnect between the housing data and the real demand
for construction workers is important and suggests that the
demand for new homes has not yet reached a level where
builders are forced to take on more full time labor. One of
the reasons why home construction has historically been very
important to the economy is the impact of the multiplier
effect from construction. Without employment turning up the
"multiplier effect" remains muted.
This is why the impact from housing on GDP is questionable.
While the upturn in housing does have some effect on the
overall economy the impact has been greatly reduced in
recent years as the economy has shifted into the global
marketplace. Today, total private construction spending
makes up less than 2% of GDP where it was greater than 5% at
the 2006 peak.
Since the turn of the century globalization has changed the
drivers of the domestic economy. While the economy was once
driven by domestic manufacturing and housing - today it is
driven by expenditures on equipment and software and exports
to our trading partners. The drive for higher profits while
delivering cheaper products to consumers required companies
to invest heavily into productivity, outsource manufacturing
and aggressively cost cut to maintain profitability. At the
same time the globalization of the market place made
exportation of products and services a much greater
percentage of overall domestic corporate profits.
Expenditures on equipment and software currently makes up
more than 8% of GDP as exports comprise more than 13% of the
economy.
The recession in Europe and slowdown in China, as witnessed
by reports from many international companies including
Caterpillar, Norfolk Southern, FedEx, UPS, Intel and IBM, is
impacting the domestic economy. The slowdown in exports is
likely to be a more substantial headwind to economic growth
than the roughly 2% contribution from residential investment
can offset.
The bottom line here is that the recent months reports are
certainly good, and welcome, news in an otherwise fairly
weak and stagnant economy. However, let's not get the
"cart in front of the horse" in assuming that the
economy is about to come roaring back to life. The
protracted stagnation in the housing market which remains at
recessionary levels well into its fourth year of activity
gives little to be excited about. The current activity falls
well within the bounds of normal volatility, and we will
likely see revisions lower in the coming months ahead, as
seasonal variations began to negatively impact the data
towards year end.
The important point, however, is that while the housing
data on the surface is showing improvement the more
important components to sustainability from employment to
lending are not. As stated above - the impact on the economy
from the recessionary drag in Europe and slowdown in
Emerging Markets is likely to have a far greater impact on
the domestic economy today than housing can offset.
