Warm December Weather Hurts Utilities & Helps Housing

December Was Hot

It’s very important to understand that December was a relatively hot month because it impacts December’s economic data. Specifically, utilities production fell because of hot weather and housing boomed. It was particularly hotter than average in the South which is the nation’s largest housing market. The map below shows the average temperature departure from the long term average. 

As you can see, it was hotter than usual throughout the country, with the Midwest and the South being particularly balmy. This was the 6th warmest month in 125 years of data. Texas, Oklahoma, Kansas, Missouri, Kentucky, Tennessee, Alabama, Georgia, and Florida all had much above average temperatures.

OK December Industrial Production

December industrial production report did fine versus estimates, but November’s readings were revised lower. The report was hurt by motor vehicle and parts production and utilities production (because of the warm weather). But the breadth of the report was solid. There were modest gains across the board. 

As you can see from the chart below, the 3 month moving (weighted) average of the percentage of manufacturing sub-sectors contracting is starting to fall. Monthly, the percentage in recession rose from 56.6% to 68.9%, but September’s reading of 86.6% left the 3 month average, so it fell.  

Details Of The IP Report

Specifically, monthly industrial production growth was -0.3% which met estimates. However, November’s monthly growth rate fell 0.3% to 0.8%. Manufacturing monthly growth was 0.2% which beat estimates for -0.2%, but last month’s growth was revised down by one tenth to 1%. 

Finally, November’s capacity to utilization rate was revised down 0.7% to 76.6% and December’s reading of 77% missed estimates by one tick. It was down 3.1% yearly; this was the 9th straight month it fell. I don’t follow this category closely now that capacity to utilization isn’t close to full.

Yearly industrial production growth fell from -0.7% to -1%. The comp went from 4.1% to 3.8%, which means the 2 year growth stack fell 0.7%. Yearly growth will likely go positive in February when the comp gets much easier. In the last manufacturing recession, yearly industrial production growth was negative for 20 straight months. 

So far, growth has been negative for 4 straight months. This slowdown won’t be as deep because oil prices didn’t collapse. It will look like a blip if it only stays negative for 5 months.

Motor vehicle and parts production growth was weak. This is just like the retail sales report. Yearly motor vehicle and parts production growth was -8.3% which fell from 0%. This was the 2nd worst reading since the start of this expansion. Worst growth rate was in October when growth was -10.8%. 

Unlike October, December had a very tough comp as growth was 8.5% in December 2018. Still, that’s not to say this industry wasn’t weak because it was. Auto makers are anticipating a weaker 2020. I see sales staying near their recent yearly range, but falling modestly again.

Yearly manufacturing production growth fell from -0.9% to -1.3% which wasn’t bad when you look at the 2 year growth stack because the comp got 0.6% harder. The growth stack actually increased by about 0.2%. Just like industrial production, yearly growth comps will get much easier starting in February. 

Finally, electric and gas utilities production was weakened because of warm weather. Yearly growth actually increased from -3.2% to -1.9%. The impact can be seen clearly in monthly growth as it was -5.6%.

Review Of 3 Housing Reports

There were 3 good housing reports this week. First was the weekly MBA applications report which showed 30.2% weekly growth which lapped a 1.5% decline. This report was from the week of January 10th. The first report of the year wasn’t hugely consequential because volumes are always low to start the year. Refinance growth was 43% which was above last week’s -8%. 

Finally, weekly growth in the purchase index was 16% which lapped 5% growth. Yearly growth was 3.7% which is still solid. In the next few weeks, the housing market will heat up because of seasonality which will make the data points more important.

January Housing Market index fell 1 point to 75 which met estimates. Just because it fell slightly, doesn’t mean this was a bad report. It was another good one. Remember, December’s reading was the highest in 20 years. I’m interested in the breakdown of this report because there were some wacky movements last month. After the present sales index rose 7 points, it fell back down 3 points to 81. 

6 month expected sales index stayed at 79. Traffic index rose 1 point to 58 which is the highest reading in at least a year. Last month’s regional action reversed. Northeast rose 3 points after falling 5. Midwest fell 7 points after rising 15. The South stayed at 77. The West rose 4 after falling 3. Now that we know about the warm weather, it’s possible the Midwest was helped by it last month.

Housing starts reading was amazing. It would be unbelievable if it wasn’t for the warm weather in December. December housing starts rose from 1.375 million to 1.608 million as you can see from the chart below. This destroyed the consensus estimate of 1.373 million and the highest estimate which was 1.4 million. This was the highest number of starts since December 2006. 

Housing permits fell from 1.474 million to 1.416 million which missed estimates for 1.458 million. The chart below shows permits lead starts. In all likelihood, starts will fall back down near permits in January. That being said, they can stay high if the weather stays hot.

Monthly starts were up 16.9% and single family starts were up 11.2% as they had the strongest reading since 2007. Multi-family starts were up 32% and had the best showing in over 30 years. Specifically, privately owned 5+ unit structures had starts rise from 406,000 to 536,000 which was the most since July 1986. With millennials moving into more apartments than prior generations, the need for multi-family starts has increased.

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