Housing Starts Beat Estimates, But Job Creation Misses By A Mile

Housing Starts Improve in January

The January housing report improved partially because the California wildfires didn’t crush starts like they did in December. Most investors knew the weather hurt results. But I we weren't sure by how much because the housing market also was weak in December. This was due to cyclical reasons and starts have also been suppressed this entire expansion. 

Housing starts rose from 1.037 million to 1.230 million which beat the consensus for 1.170 million. The December report was revised down from 1.078 million, making it look even worse. It’s notable how economic reports can have negative blips. That’s something to keep in mind when we review the huge job growth miss in the February BLS report.

Housing Starts - After falling 28% in December, housing starts in the West increased 29%.

To be clear, we knew how much the West hurt housing starts. But we didn’t know how much of its weakness was caused by the wildfires. 

Now we know wildfires caused most of the entire weakness. The housing market wasn’t only weak because of weather though. Housing starts in the South fell 8% in December. The biggest housing region (the South) reversed that decline in January as it grew 14%. 

As you can see from the chart below, there was a 25% spike in single family housing starts. Multi-family housing starts increased 2.4%. Real residential investment growth will surely be boosted by this growth. I will review how this report affected the Nowcasts next.

Permits weren’t impacted by the weather in December, so there wasn’t a huge spike, but the result still beat estimates. Permits rose from 1.326 million to 1.345 million which beat the consensus of 1.287 million. This section of the report was the opposite of starts because single family permits brought down the result. 

Single family permits have fallen in 3 of the past 4 months as they were down 2.1% in January to 812,000 which is the lowest level in 17 months. Overall permits increased 1.4%. West had a decline of 9% and South fell 3.5%. Midwest and Northeast catalyzed the increase in permits.

Housing Starts - NY Fed Nowcast Increases

The March 8th update of the Atlanta Fed’s Nowcast stayed at 0.5% Q1 GDP growth. New residential investment growth estimate increased from -10% to -7.7% because of the housing starts improvement. 

That estimate is probably too negative if housing starts are strong in February and March. They won’t be as weak as December as the housing market is rebounding modestly and the California wildfires are over with. December housing starts report is irrelevant to Q1 GDP. 

Atlanta Fed Nowcast didn’t change because the employment report lowered the estimates for real personal consumption expenditures, real private non-residential fixed investment, and real government expenditures. February job creation is certainly consistent with 0.5% GDP growth, but the January reading wasn’t.

NY Fed’s Nowcast had a huge turnaround on Friday as the Q1 estimate increased from 0.88% to 1.4%. Building permits added 0.16% to the estimate and housing starts added 0.4% to growth. The labor report didn’t affect this Nowcast because the unemployment rate lowered it by 5 basis points and the total employees hurt it by 5 basis points. 

Even though the ADP report was solid and beat estimates, unlike the BLS report which missed estimates by a lot, the ADP report caused this Nowcast to fall 3 basis points. The amazing non-manufacturing ISM PMI helped it by only 4 basis points and the Markit report wasn’t included. This was only the 4th increase in the overall estimate and was the largest one by far. Q2 Nowcast also increased as it went from 1.19% to 1.51%. The housing report helped the Q2 estimate by 0.27%.

Housing Starts - Leading Index Turnaround Is Real

Weekly leading index’s year over year growth rate improved again to the highest level since early November as you can see from the chart below. Growth improved from -4.2% to -3.7%. It’s still down from last year, but it’s fairly clear this index will go positive this spring because the comparisons are getting easier. 

ECRI as a company has been discussing an economic slowdown since late 2017. It will be interesting to see when their tone shifts and follows their index. It’s weird to entertain the concept that a firm can be ahead or behind it’s own index, but that occurs because it doesn’t want to be seen as changing its mind too much. It doesn’t look good to change your mind often, but sometimes that’s the best way to react to economic reports. 

This improvement and the stock market’s 5 day losing streak makes me more bullish than I was a week ago.

Housing Starts - BLS Report Misses Estimates

In this section, I’ll review some of the headlines from the February BLS report. Headline job growth missed estimates by a mile as it was 20,000 instead of 175,000. The January report of 304,000 was revised up to 311,000. I was interested in seeing if that great report would be revised lower. Instead of a negative revision, the February headline reading was a disaster.

The 291,000 decline in job creation was the 3rd biggest monthly fall since June 2010. Tecent terrible reports have been followed by a big rebound. 

In 2016 job growth of 15,000 was followed by growth of 282,000. In 2017, job growth of 18,000 was followed by growth of 160,000. Even though this report missed estimates, it continued the streak of monthly job growth which is up to 101 months. This is by far the longest streak in history. The reading could easily be revised negatively and end the streak, but since it was so weak, I think there’s a better chance it is upwardly revised than cut. 

As you can see from the chart below, the 3 month average is still at solid 186,000, and the 12 month average is strong at 209,000. There deserves to be lipstick on this pig of a report.

Housing Starts - Conclusion

There have been 3 terrible economic reports recently. 

December retail sales and housing starts were recessionary. BLS report adds to this group as 20,000 jobs added is much below the job creation needed to keep up with population growth. 

The rebound in housing starts signals these negative blips can easily be reversed. I don’t see how the labor market went from being spectacular in January to terrible in February even though jobless claims have been solid. My viewpoint on the labor market hasn’t changed much as a result of this report.  

Spread the love