Today’s update on new housing starts and building permits for April isn’t surprising, but it’s still not encouraging. Permits slipped 4% last month and are down by nearly 13% from a year ago. Housing starts look even worse, falling nearly 11% in April, pushing the seasonally adjusted annual rate down by 24% vs. the year-earlier number.
The residential real estate market remains in a deep slump and there’s nothing in today’s numbers from the Census Bureau to tell us different. The only questions: 1) Will the slump worsen; and 2) if the answer to first question is yes, will it drag down the rest of the economy?
Answering no in both cases is still reasonable, although the level of confidence with that outlook is far from robust. The main bit of evidence for thinking that we’re not looking at a new leg down comes from reviewing history. As the chart below reminds, starts and permits have been moving sideways for three years. Unless you think a new recession is lurking, there’s a case for thinking that the range will hold. Today’s update brings us into the lower realm of that channel, but there’s nothing unusual here, judging by recent history.
Then again, if the broader economy is set for another rough patch, the housing market may suffer even deeper levels of pain. Unfortunately, the margin for comfort is now unusually thin. Last year at this time, starts and permits were moderately higher. That didn’t stop the summer slump of 2010 from taking a toll. But the worst levels in starts and permits of last year are now north of current levels. The margin of comfort is evaporating fast.
It doesn’t help to learn that industrial production was flat last month vs. March, or that manufacturing production slipped 0.4% in April after nine straight months of growth, according to the Federal Reserve update today.
The good news is that the broad trend for industrial production is still positive, as the second chart below shows. Indeed, the 5% year-over-year increase for this series last month is well above average. Historically, that’s a strong number. Of course, it’s destined to fade, and perhaps by more than the crowd expected just a few weeks ago.
Analysts say that industrial production stalled last month because of a drop in auto production, which was hit by the blowback from supply-chain disruptions due to the Japanese earthquake in March. In other words, technical difficulties are to blame. Maybe so, but that doesn’t change the fact that housing is still weak and possibly set to get weaker. Meantime, new questions about the labor market’s strength are still bubbling.
The focus now shifts to Thursday’s update on new jobless claims. The consensus forecast calls for a modest drop. Anything less may bring a major attitude adjustment.