Housing starts rose to a 1.18 million-unit annualized rate in February, slightly above expectations for the month. January starts were revised up. Moreover, in a sign of broader-based healing in the housing sector, gains were stronger in the single-family market. The surprise is where those gains came from. All of the growth in single-family housing starts occurred in the Midwest and West; single-family starts remained unchanged in the South while the Northeast lost ground over the month. That could be partially attributed to winter storms, which hit the Eastern seaboard and disrupted construction activity.
Building permits were weaker than many had hoped. That is less a sign of underlying demand, however, and more of a sign of backlogs. Builders are complaining that the backlog on permits being issued has been growing dramatically over the last year; this is hindering their ability to respond to burgeoning demand, which now looks like it is moving outside of city centers. Lower oil prices are making it easier for builders to sell properties with a longer commute.
The multifamily market is experiencing growing pains, despite the ongoing demand for rental properties. Too much of the construction we have seen in recent years has occurred in luxury apartments. That is hurting affordability and is expected to show up as a drop in rents in some of the larger metropolitan areas come year-end. Chicago is among the places where rents could fall in some sectors.
Separately, the Consumer Price Index (CPI) fell 0.2% in February, with declines in energy prices and some food prices offsetting sharp increases in medical services and moderate gains in shelter costs. Core (ex-food and energy) CPI jumped a more-than-expected 0.3% in February, up 2.3% from a year ago. That is the strongest year-on-year reading for core CPI since September 2008 and will give ammunition to hawks to push for more as opposed to fewer rate hikes in 2016 at today’s FOMC meeting. The Federal Reserve’s Vice Chair Stanley Fischer, in particular, is from a different generation than some of his colleagues and he is much more concerned about accelerating rather than decelerating price levels. He has made a point of noting the “hotter” figures showing up in the CPI as opposed to the Fed’s official inflation measure, the Personal Consumption Expenditures (PCE) index, which has been running cooler.
Bottom Line: Today’s data reveal an economy that is resilient in the wake of additional turbulence abroad. Popular anger over what we have lost, however, is deep-seated. It also appears that at least a portion of the oil dividend we have received at the gas pump is being eaten up by surging health care premiums. This does not make consumers “feel” as good about the economy.
Affordability in housing is also becoming a problem, as demand continues to outpace supply. This could be another reason Americans are unhappy and it show up in November when they go to the polls.
The Fed needs to tread cautiously by raising rates slowly and not discounting the economic pain felt by many. This is especially true this year, when Fed-bashing has become sport among extremists on both the left and the right.