Housing starts underperformed the Bloomberg Econoday Economists’ Consensus Estimate enough for the Atlanta Fed GDPNow Forecast to give back the 0.1% it gained yesterday, yet the report is still considered “solid”.

Don’t let the headline fool you, the housing starts & permits report points to solid strength for the housing sector. Starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate but the April rate, which was already one for the record books, is now revised higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April. Forecasters will be revising their second-quarter GDP estimates higher following today’s report, not to mention their estimates for Thursday’s index of leading economic indicators where permits are one of the components.

Permits are the leading indicator in the report and the latest rate is the best since way back in August 2007. The gain is centered in the Northeast followed by the Midwest. Turning to starts, the monthly step back is split between all regions with the Northeast, in contrast to permits, showing the largest percentage decrease.

The housing sector is moving to the top of the economy, just as many suspected following a first quarter that was depressed by heavy weather. Watch tomorrow for descriptions of the housing sector in the FOMC statement and also Janet Yellen’s comments at her press conference.

Atlanta Fed Forecast Revised Lower

I do not know what economists in general will do, but I do know that contrary to Bloomberg’s prediction, the Atlanta Fed’s GDPNow Forecast ticked down following today’s report.

Latest forecast — June 16, 2015

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 1.9 percent on June 16, unchanged from June 11. The nowcast for real GDP growth ticked up to 2.0 percent after yesterday morning’s industrial production release from the Federal Reserve boosted the forecasts of real investment in petroleum and natural gas well structures and motor vehicle and parts dealer inventories.

The GDP nowcast moved back down to 1.9 percent after this morning’s housing starts release from the U.S. Census Bureau reduced the forecast for real residential investment growth from 8.8 percent to 6.8 percent.

Evolution of GDPNow

Comparing both April and May to the abysmal March is as lame as it would be to label the decline today as overwhelming.

If this is weather-related as economists insisted, then this is a weather-related snap-back as well. Which is it?

Before anyone gets really excited by housing numbers, here is a bit of historical perspective.

Housing Starts Historical Perspective

At this level of starts, the economy was in recession a perfect seven times out of seven previously. And on a population adjusted basis, this number of starts is actually pathetic.

Nonetheless, housing will still add to GDP as conditions are generally improving.

Mike “Mish” Shedlock