The much ballyhooed second quarter recovery is firing on about 1/2 cylinder out of 4.
April housing starts came in at 1.172 million Seasonally Adjusted Annualized (SAAR), were well under the Econoday consensus estimate of 1.256.
March was also revised lower from 1.215 million to 1.203 million.
A topping out from lower-than-indicated expansion highs is the news from the April housing starts report where levels, though still healthy, are disappointing. Starts fell 2.6 percent to a 1.172 million annualized rate that is well below Econoday’s low estimate for 1.215 million. Downward revisions are a factor in the report, totaling 27,000 in the prior two months.
The strength in the report is in the key single-family component with starts up 0.4 percent to a rate of 835,000. Otherwise, however, the report is filled with minus signs. Permits for single-family homes fell 4.5 percent to a 789,000 rate with completions also down 4.5 percent, to 784,000.
The sharpest weakness comes from multi-family homes where starts fell 9.2 percent to a 337,000 rate. Permits did rise 1.4 percent to 440,000 but completions dropped 17.2 percent to a 322,000 rate.
April was supposed to be a rebound month for the economy. It was for the jobs report but bounces in last week’s retail sales and consumer price reports were minimal with today’s report an outright negative for the second quarter. Still most housing data, especially sales, have been showing significant strength going into the spring sales season.
April Permits, Starts, Slip from March Levels
Mortgage News Daily reports April Permits, Starts, Slip from March Levels
Permits for privately owned housing units were at a seasonally adjusted annual rate of 1,229,000 units, a decline of 2.5 percent from the estimated 1,260,000 permits issued in March. Analysts polled by Econoday had expected permits to be much higher, a range of 1,255,000 to 1,290,000, with a consensus of 1,271,000. Permitting for the month did remain above the annual rate of 1,163,000 in April 2016, an increase of 5.7 percent.
Housing starts in April were at a seasonally adjusted annual rate of 1,172,000 units, a 2.6 percent decline from March. The original March estimate of 1,215,000 starts was revised down to an annual rate of 1,203,000. The April estimate was 0.7 percent higher than the estimate a year earlier of 1,164,000.
Analysts were way wide of the mark. They expected starts to be in the range of 1,215,000 to 1,290,000. Their consensus was 1,256,000
Completions were at a seasonally adjusted rate of 1,106,000, 8.6 percent below the estimated 1,210,000 rate in March but 15.1 percent higher than in April 2016. Single family completions, at 784,000, represented a loss of 4.5 percent for the month but were up 10.1 percent year-over-year. While multi-family completions were up by 24.6 percent from a year earlier, to an annual rate of 299,000 units, they lost 19.8 percent compared to March.
Perspective on Starts, Permits, Completions
Starts, Permits, Completions Detail
Compared to prior years dating all the way to 1960, these are exceptionally poor recovery numbers. Moreover, a deceleration in growth since 2014 is pretty clear.
Weather-Related Effects
Following first-quarter construction numbers, GDPNow posted a second-quarter GDP estimate to 4.3%. I proposed it would not last and was weather related.
4.3% Really?
In Investigating Weather-Related Effects on Construction Spending I posted this chart that explains the jump in the initial GDPNow forecast.
I asked Pat Higgins, creator of GDPNow if he could plug in construction revisions into his model to see what impact that would have on GDPNow.
Unfortunately, that was not possible.
Reply from Pat Higgins
Hi Mish,
I can’t answer your question about the revision of the first quarter based on the revision to the construction numbers because I’m not exactly sure how the Bureau of Economic Analysis handles these after an annual construction spending revision.
In particular, fourth quarter GDP isn’t scheduled to be revised until July 28th. But the construction spending numbers were revised back to 2015 with the annual revision.
If you look at the values of the construction spending values in the BEA’s Key Source Data and Assumptions Table, you’ll see that the construction spending numbers for January and February are denoted as estimates as subject to revision and the March estimate are denoted as assumptions for missing values for source data. I assume they mean subject to revision in the second and third GDP release. The October through December values are not denoted as either of these although these values were revised after the GDP report. So I’m not exactly sure how the BEA will handle the January–March construction spending data given that fourth quarter GDP won’t be revised until July 28th. You might want to contact the BEA about this.
Just speaking generally, the second quarter growth rate for a particular monthly indicator will approximately equal a weighted average of its February through June growth rates where the weight on the February growth weight is (1/9) and the weight on the March growth rate is (2/9). So revisions to February (or March) growth rates do matter for the model’s second quarter forecasts.
I can’t give my personal view on second quarter growth. In this macroblog article – Can Two Wrongs Make a Right? I provided a table with some summary statistics about the performance of the model 11 weeks before the first GDP release. And we have some calculations in the tab Track Record of our Excel File. The average absolute forecast error of the model 85 days before the release has been about 1.15 percentage points historically in real time since 2011:Q3. Hope this helps.
Pat
Once again, I thank Pat Higgins for generously answering all my questions as best he can.
Weather-Related Effects Part Two
The above graphic from today’s Residential Construction Report by the BEA.
How much of those strong numbers in January and February were related to good weather?
Here is an interesting paragraph from Can Two Wrongs Make a Right?
A closer look at the chart also reveals that GDPNow has had a tendency to overestimate the contribution of business fixed investment to growth and underestimate the growth contribution of inventory investment. Although these subcomponent biases have nearly offset one another on average, we really don’t want to have to rely on “Saint Offset.” We would like the subcomponent forecasts to be reasonably accurate because the subcomponents of GDP are of interest in their own right.
Add in extremely volatile construction spending reports that are nearly useless, then top that off with huge seasonal factors, and you get strange things like 4.3% GDP estimates.
Weather-Related Jobs
As noted previously, economists were quick to point out the bounce in the April Job’s report (see April Payrolls Bounce, Revisions Take March Lower: Hiring Increasingly Volatile). I commented …
Today’s establishment employment report shows a huge, 211,000 jump in reported jobs vs a downward revised March. The BLS revised March even lower, to 79,000 from 98,000. Revisions also took February up to 232,000 from 219,000.
Last month, economists blamed the weather. If so, the correct thing to do is average both months as employees not hired in March due to weather would have been hired in April instead.
The two-month average is 145,000 per month. That’s not a disaster, but it’s not particularly strong either.
I repeat my assertion that if March was primarily weather-related, then the job bounce in April should have been much stronger.
In addition to other flaws, it appears economists do not even understand simple averaging.
It will take a couple more jobs reports to determine is March was an aberration or the start of a slowdown. Regardless, April was not as strong as widely touted.
Think Outside the Model
It’s best to think outside the model when screwy reports come pouring in.
For further discussion, please see Tracking GDPNow Forecasts vs. Reality: What About that Initial 2nd Quarter Estimate?
I expected second-quarter GDP estimates would sink after this dismal report. They didn’t, yet. The GDPNow forecast rose.
Mike “Mish” Shedlock
“March was also revised lower from 1.215 million to 1.203 million.”
…
Don’t stop there.
Numbers are SAAR
February 1.303 million —> 1.288 million
January 1.241 million —> 1.236 million
December 1.275 million —> 1.268 million
I am really struggling to see how GDPNow rose after this disaster
Mish
Not too surprised.
GDP growth is quarter over quarter (and then annualized). If you revise a prior quarter’s number lower it makes current number look better. Voila.
How much price deflation is going on?
?
Product deflation perhaps. Less for the same.
Don’t know … but more coming … much more.
Thanks.
That’s where the magic of marketing comes in.
Industrial Production beat consensus with +1.0%
Manufacturing portion up +1.0%, as well
Due in large measure to …
“The increase in durables was spearheaded by a large advance for motor vehicles and parts”
perfect juxtaposition with announcement of Ford cutting 10% of labor force … and GM has been cutting since beginning of year.
I did note that IP rose on Autos. If accurate (revisions coming?) payback will be huge.
That Jobs report is truly suspect as well.
Mish
accurate revisions to the upside for autos? and jobs? Remember that strong housing, strong jobs & strong autos = strong inflation (which we are seeing as I have mentioned many core items that people think have fallen in price have been rising in price due to red hot demand such as computers & apparel and especially travel & vacation related items and services
accurate revisions to the upside for autos? and jobs?
There will not be upside revisions to auto sales. Those numbers come from manufacturers, not the government. If anything they are overstated.
That FRED housing really puts the situation in perspective. If I was a betting man I would suggest in is in the process of rolling over to the lower confidence interval.
Classic, multiple examples of making the news/narrative fit the Fed’s sudden desire to raise interest rates as quickly as possible.
Reality is another matter altogether.
Who controls a narrative is #1 question.
Then ask why.
Then how.
Then for what purpose.
Spot on.
Note also that, according to your chart, prior to 1990 the housing market seems to have actually tracked/followed the economic cycle in a causal and correlated fashion and then, apparently, housing operated ex nihilo until 2007 when the great levitating transubstantiation of all values hit the fan, WOP, during the Great Recession, and then the Great Transubstantiation moved on from the growing homeless with out papers to ensure that, ex nihilo, fifty magical genders, like the proverbial hoard of angels on a medieval pin head, must share a one hole Target bathroom on the way to San Jose to pay homage to the city of Saint Francis and Madam Speaker’s Great Transcendental Tenderloin while wearing flowers in their hair singing Puff The Magic Dragon. Ooooom.
Looking strong??
WASHINGTON, D.C. (May 15, 2017) – The Mortgage Bankers Association (MBA) Builder Applications Survey (BAS) data for April 2017 shows mortgage applications for new home purchases decreased 4.3 percent compared to April 2016. Compared to March 2017, applications decreased by 20 percent relative to the previous month. This change does not include any adjustment for typical seasonal patterns.
https://www.mba.org/2017-press-releases/may/april-new-home-purchase-mortgage-applications-drop-43-percent-year-over-year
Mish,
The problems are with the building departments and planning departments and their onerous requirements making it not feasible. To build new projects! My boss, a developer, has been negotiating with one city for a year! And still not ready to submit for approval! They don’t WANT anyone to build! I think they want to fight Trump on every level! They complain about the lack of low cost housing, when they are to blame! Not the developers-who take all the risks!
Those Demcrats will cut their heads off to spite their noses.
“They complain about the lack of low cost housing, when they are to blame! Not the developers-who take all the risks!”
…………..
They take all the risks with other people’s 401k money. Buy high and let the taxpayer mop up the mess afterwards.
I think the city is doing everyone a big fat favour at this point.
How soon they forget.
Should’ve let the homebuilders BURN … but noooo … anyways, it was all about bailing out stocks and wall street …. and it was “only” taxpayer money.
…
ON Nov. 6, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009 into law, extending unemployment benefits by 20 weeks and renewing the first-time homebuyer tax credit until next April.
But tucked inside the law was another prize: a tax break that lets big companies offset losses incurred in 2008 and 2009 against profits booked as far back as 2004. The tax cuts will generate corporate refunds or relief worth about $33 billion, according to an administration estimate.
Before the bill became law, the so-called look-back on losses was limited to small businesses and could be used to counterbalance just two years of profits. Now the profit offset goes back five years, and the law allows big companies to take advantage of it, too. The only companies that can’t participate are Fannie Mae and Freddie Mac and any institution that took money under the Troubled Asset Relief Program.
Among the biggest beneficiaries are home builders, analysts say. Once again, at the front of the government assistance line, stand some of the very companies that contributed mightily to the credit crisis by building and financing too many homes.
http://www.nytimes.com/2009/11/15/business/economy/15gret.html
This wouldn’t happen to be in California, would it? Sounds very familiar.
I am sticking to my recession calls made in 2012, 2013 and 2014. I took a break in 2015 and 2016. Not sure about 2017 though.
Big breakdown 2019/20, big wobbles before.
When the big break comes it will put all else before into context and then previous events will be seen as wobbles only no matter how traumatic they seem at the time.
My humble opinion only based on interpretation of psychology and esoteric stuff. 2019/20 will change the world.
What’s the “esoteric stuff”?
You have to know the secret handshake to find out.
Your housing start graph shows that starts remain tepid for a recovery. Look at the bright side, they have less far to fall, or could even keep growing and still not equal previous peaks.
Starts are back to where they were in the 1960 recession, and yet we have an additional 100 million people in the U.S. That’s one fabulous “recovery”. LOL!
No US recovery, under this or any other president — unless and until Obamacare gets repealed and health COSTS get addressed instead of insurance fraud.
30% cost increase is greater than (ahem) 4% nominal GDP growth … DUH!!!!
Too many so-called “liberals” seem to have trouble with the 30>4 thing.
(Mish might argue the 4% nominal GDP growth is overstated — but only strengthens the point. 30% > 3%, also greater than 2%….)
Not to worry. The Fed has the Home Builder’s backs. And the Auto Manufacturers backs. And Amazon’s, Facebook’s, and Tesla’s and Netflix’s and the Bank’s and Everybody’s backs. Party on.
The GDP stats won’t go negative until the agenda changes.
Auto manufacturing is a disaster (ask Ford, GM will just lie) and the end-of-lease supply deluge has just started.
Google is an advertising company that had incredible “growth” from stealing market share away from dinosaur advertising media. The total market size (which is the maximum Google can take) isn’t growing anything like Google’s P/E multiple expects.
Netflix is a movie studio. Solid business model. It also sells monthly movie theater passes (unlimited viewings) for $10 a month (give or take). Another solid business model. But movie studios and theater chains don’t have as high a P/E multiple.
Facebook just admitted for the 5th time that their advertising counter overstates eyeballs — and they are being forced to issue refunds. This is the 5th major problem, not counting lots of smaller problems or the many cases where facebook doesn’t acknowledge a problem. Its the next AOL — overpriced, over-hyped, and the cool kids already moved on.
Tesla is a ponzi scheme wrapped in a government subsidy scam. Even if they cleaned up their act and went legit (yeah right) — they would become the next Govt Motors.
And the Fed? They lost control and more critically they have lost credibility.
All the new apartments going on line that people can’t afford will be a problem going forward. We as a society create problems when we try to deny that many people go through life making their own problems and then allow the government to sidestep the issue by pawning the problem off on the private sector.
When a person fails to pay their rent they get tossed out on their ear. An eviction on someone’s record usually means they become ineligible for government housing programs. By making them “ineligible” for certain programs the government shrewdly and cleverly sidesteps having to deal with these people.
The brutal truth is that government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments while dumping the rest on the private sector. This drives up rental prices on everyone else. More on this subject and other issues concerning housing in the article below.
http://brucewilds.blogspot.com/2017/04/housing-policy-heaps-misery-on-private.html
Once autos were “durable” but decreased in utility rapidly in about 3 to 4 years.
Today autos are still “durable” but stay useful for 10 years or more. Many can survive over 500,000 miles with minimal upkeep.
Then there is UBER, leases, increased public transit, and working from home. Thus the long term view of auto sales is bleak.
Houses were always considered to be “durable” and have a lifespan of 30 years or more with regular maintenance. However today, many have reduced maintenance costs.
Today we have cement siding, better termite protection, longer life roofs, water delivery systems designed for easy repair (and lower cost to the Builder). Once the windows are replaced (Builders still use cheap ones), the long term maintenance costs are reduced and the economic life increases.
Thus “good auto and home sales” forecast a LONG PERIOD of decline for the makers of these “durables”.