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Thursday, January 17, 2013

Strong housing and labor market readings this morning should add to optimism about the overall economic picture and offset the weak earnings reports from Bank of America (BAC - Analyst Report) and Citigroup (C - Analyst Report). While the debt ceiling issue remains an overhang for this market, today’s better-than-expected Housing Starts and Jobless Claims data should help add to optimism.

It is perhaps to reasonable to take the amazing drop in initial Jobless Claims this week with a pinch of salt, but the drop is nevertheless welcome. Initial Jobless Claims dropped a much bigger than expected 37K this week to 335K, the lowest level since early 2008. Seasonal variations most likely are at work in this week’s drop as the claims data typically jumps in the initial weeks of January. The four-week average, which is relatively less volatile, dropped to 359.3K from 366K the month before.  

But even if one has some doubts about this morning’s claims data, there are no questions about the positive tone of the December Housing Starts numbers, even though the numbers are seasonally adjusted. Housing Starts increased to the seasonally adjusted annual rate of 954K in December relative to expectations of 890K and November’s 851K (revised down from the originally reported 861K level).

The December Starts level is up 37% from the same period last and is the highest level since June 2008. This data provides further confirmation of the broad improving trend in the home construction sector, which could potentially offset weakness from the export side and keep overall economic growth stable. ??????

The strength was broad-based, both in terms of regions as well as structure type. Starts increased 24.7% in the Midwest, 21.4% in the Northeast, 18.7% in the West and 3.8% in the South. In terms of structure type, single-family home starts increased 8.1%, while gains on the multi-family front were 20.3%.

Unlike Starts, the gains on the Permits front were roughly in-line with expectations. Building Permits increased 1.3% in December, with single-family permits up 1.8% and multi-family permits up 2.1%.

Gains in the homebuilder sentiment index, a leading indicator of home construction, in recent months confirms the positive momentum on the home construction front that we have been hearing from homebuilders like Lennar (LEN - Analyst Report), Pulte Homes (PHM - Analyst Report) and others. While the January homebuilder sentiment index released yesterday didn’t change from the month before, its 2012 gain has been one of the highest on record.

Based on the historical correlation between the index and housing starts, some analysts estimate that the index’s current level is consistent with housing starts that are almost double the current pace. This would mean that housing starts could continue to improve even if the index doesn’t show much improvement in the coming days. Bottom line, housing could potentially be a bigger contributor to GDP growth this year than has been the case in recent quarters, offsetting slack from the external sector.

Sheraz Mian
Director of Research

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