January Housing Starts, Industrial Production and Producer Prices
Economics in a nutshell: “Economic performance remained mixed in January as manufacturers kept expanding but housing continued to wander around.”
INDICATOR: January Housing Starts, Industrial Production and Producer Prices
KEY DATA: Starts: -2%; Permits: -0.7%/ IP: +0.2%; manufacturing: +0.2%/ PPI: -0.8%; Non-Energy: -0.2%
IN A NUTSHELL: "Economic performance remained mixed in January as manufacturers kept expanding but housing continued to wander around."
WHAT IT MEANS: The first quarter is not starting out on a high note. I am not talking about weakness, but I had expected to see a rebound from the fourth quarter's moderation and it is not clear that has happened. The housing sector remains an enigma. Low interest rates are doing nothing to get the buyers out and housing starts eased in January. That said, the level is the same as the fourth quarter average, so the sector is not losing ground. Cold weather played a part, as there was a huge 22.2% drop in the Midwest. Looking forward, permits and starts are pretty much in line, the number of homes permitted but not started is falling and the number of homes under construction is up, so we could see another decline in February. Indeed, the drop in the February National Association of Home Builders/Wells Fargo Housing Market Index seems to confirm that belief. I suspect there will be few starts in New England and the Midwest in February as the cold and snow make it impossible to do anything outside.
Meanwhile, manufacturers keep on expanding, despite a slowdown in vehicle assembly rates. The rise in manufacturing production was fairly broad based with eleven of the nineteen industries posting gains. One was flat. Production of consumer goods, business equipment and supplies, computers and materials were all up.
As for business cost pressures, at least on the goods side, there is very little. Producer prices fell in January and even excluding energy, they were still down. Food cost pressures seem to have disappeared as prices dropped sharply. Services prices edged down as well. Indeed, you had to look awfully hard to find any category that posted a price increase. The inflation pipeline is also empty as prices are declining at both the intermediate and crude levels.
MARKETS AND FED POLICY IMPLICATIONS: Once again, the economic reports were inconsistent. The housing data seem to indicate that the sector is largely going nowhere and will be a non-factor in growth this quarter. With the terrible February weather, starts could fall, but if anyone knows what March will be like, please tell me so we both know. On the other hand, the manufacturing sector remains solid and with vehicle sales still strong, this component should sustain growth. What that says to the Fed is anyone's guess but the continued declines in business costs will bring out the doves on the FOMC who will argue there is no reason to worry about inflation so rates can remain low. Meanwhile, investors will have to figure out what the conflicting data mean for not only growth but also for Fed policy. I believe it is still about labor market tightness and all the signs are flashing red. When the troubles finding workers finally forces firms to abandon their refusal to raise compensation is hard to know. Changing CEO and CFO psychology is awfully hard.
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