Lance Roberts | Oct 18, 2012 01:18AM ET
- this was the always bullish Joe Weisenthal's headline yesterday morning following the release of the New Home Starts and Building Permits data. "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. In the now 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 being able to call this a recovery.
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.
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.
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.
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.
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 (CAT), Norfolk Southern (NSC), FedEx (FDX), UPS (UPS), Intel (INTC) and IBM (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 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.
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