There’s a couple of economic reports out today that don’t really tell us much more than what we’ve already learned over the past month or so. Things aren’t getting a lot worse but they aren’t getting better either.
First, industrial production fell 1.1% in May versus April. April’s number was revised downward from a negative 0.5% to minus 0.7%. Production of automobiles and high tech equipment declined substantially. Both Chrysler and GM had closed their plants during this period. Ex-autos production fell 0.9%.
Two other measures are worth mentioning. Capacity utilization fell to 68.3% in May from 69% in April and producer prices rose 0.2% while core prices declined 0.1%.
Housing starts were up 17.2% to a seasonally adjusted rate of 532,000. Most of the gain was in multi-family construction which were up 62% . Single family starts were up 7.5% which represents a SAR of 401,000. Permits for single family houses were up 7.9% to stand at a 408,000 rate. These are some of the most volatile statistics that you will see, so don’t put too much faith in any one month series of data.
Diana Olick had a good bit of analysis on the housing starts on her blog today:
But analyst Ivy Zelman gave me a huge nugget: 50 percent of sales in May were on spec. She says we’re seeing a lot of spec homes now because, “today’s consumer wants to touch and feel the house.” The positives are that cancellations are down, sales are better and there’s less negative pricing, although discounts are still prevalent.“The patient was without a pulse in the fourth quarter,” Zelman notes, “and now the patient’s in ICU.”
So why all the spec now? Because builders are trying to jam all these homes into buyers’ pockets before the expiration of the $8000 first time home buyer tax credit. It turns into a pumpkin November 30th.
The big wrench in that tactic is mortgage rates. Zelman claims, “the market collapsed last week.” Yes, it’s now summer, but she says that in Northern California, Las Vegas, Seattle, Chicago, the numbers went back to fourth quarter lows. The spring offered incredible affordability, but the rise in interest rates and the impending end of the tax credit could choke that off in summer.
There are more foreclosures coming, the tax credit is expected to expire in a few months, interest rates are up and it seems unlikely that the Fed can push them back down into the 4.5% range and the summer selling season will be over in another 60 days. The housing market may be showing some signs of stabilisation but it’s got a lot of hurdles to overcome. It looks, at best, like a really slow recovery.
We have yet to see any signs of a break-out to the upside in the data. The economy is fragile and I think vulnerable to a move back down if it receives any unexpected shocks. Unfortunately, oil and the price of gasoline are acting like they just might deliver that shock.