INDICATOR: March Housing Starts and Industrial Production
KEY DATA: Starts: +2.8%; Permits: -2.4%/IP: +0.7%; Manufacturing: +0.5%
IN A NUTSHELL: "Housing may be coming back only slowly but the continuing rebound in manufacturing activity points to an economy that is picking up steam after the winter hibernation."
WHAT IT MEANS: Housing activity was battered by the winter and higher mortgage rates and prices haven't helped either. Yes, housing starts improved in March, the second month of gains after a collapse in January. But the level was not nearly as high as they were at the end of last year. That may have been due to the first week of the month being pretty cold and snowy, so no judgment should be made on the status of this sector until the April numbers come in. Indeed, when you see a 31% surge in the Northeast and an astounding 65.5% rise in the Midwest, it is clear that not all of the winter's impacts have been backed out of the data. The decline in permits was not a major surprise. Starts had been running well below permit requests and builders are not spending cash on idle permits because they like to. But permits are still above starts and that does point to more construction in the months ahead.
While housing is slowly coming back, manufacturing is rebounding with a vengeance. The sharp drop in manufacturing output seen in January was wiped out in February. A solid March gain simply built on that recovery. Both durable and nondurable manufacturing activity rose, though there was a small cut back in the vehicle sector. Assembly rates, which had popped 9% in February, were scaled back a touch. Given the strength of the March sales, I suspect they will be upped again in April. With consumer and business product production up solidly, it is clear that the manufacturing improvement is broadly based.
MARKETS AND FED POLICY IMPLICATIONS: The winter is over, though we did hit 32 degrees last night in Philadelphia with some of the northern suburbs seeing snow. Okay, maybe it is almost over. Regardless, the recovery from the problems that might have been created by the snow and cold is progressing rapidly. Yes, housing has not yet come back to levels seen in November or December 2013, but let's give it some time. First quarter starts averaged the same as they did in 2013 and that was with the winter weather. I expect that construction will increase by about ten percent this year, which is not too shabby. But the real eye-opener was the manufacturing production numbers. After totally tanking in January, plant output recovered to post a 1.8% first quarter gain. That is in line with the roughly 2% GDP growth that I have forecasted. It also points to accelerating activity and if that momentum is sustained, we could have a very big second quarter growth rate. Investors should be buoyed by these reports as economic fundamentals, not Fed asset purchases, are the key to higher stock prices. As for the Fed, as long as the data keep improving, the tapering will continue. The FOMC meeting should confirm that expectation at its next meeting in two weeks.