KEY DATA: Starts: up 15.0%; Permits: up 11.6%
IN A NUTSHELL: “Any doubts about the housing market coming back should be erased with the strong improvement in construction.”
WHAT IT MEANS: The weak have indeed taken the leadership position. Housing, the usual engine of recovery had been the little train that couldn’t. Now it appears to be the big train coming down the tracks. Housing starts soared in September to the highest level in over four years. This occurred despite a slowdown in the Northeast. In the rest of the nation, construction soared. And this is not the end of the boom. Over the past three months, permit requests have been running about 50,000 a month higher than starts and builders are not laying out the cash for nothing. Indeed, the number of units permitted but not started has been rising lately and I suspect builders will try to cut into that going forward. Look for housing starts to continue to filter upward. I say “filter” because as with all the data, starts and permits are volatile and when you get a huge rise one month, you frequently get a pull back the next. But I have little doubt the trend is up. 
MARKETS AND FED POLICY IMPLICATIONS: This is a great report that is either another example of “those Chicago guys” fixing the data or a true measure of the condition of the housing market. Given that homebuilders’ confidence is continuing to rise on the basis of improving demand, I think you can trust that the improving housing numbers are real. Indeed, construction might have been stronger if credit was more readily available. That was a major complaint of developers and the biggest reason their optimism didn’t increase even further. The ridiculous conspiracy discussion is taking away from the simple fact that the recovery is shifting gears: Consumers are spending on big and little ticket items, manufacturers are beginning to ramp production back up, the housing market is on the rise and earnings are solid. The only outlier is job creation and there is a good reason that is lagging: Congress. The improving housing sector is likely to add significantly to third quarter growth so look for estimates to be revised upward. I have been way out on a very thin limb as my forecast for the second half of this year is well above most other economists. I still could be totally wrong but it does look like third quarter growth could be between 2.5% and 3% with only a widening trade deficit keeping the expansion from being even stronger. That report will be out on Friday, October 26th and it should provide a good picture of where we are right now. As for the markets, if investors really start believing that the economy has turned the corner, it should buoy confidence in the equity markets and raise real questions about how much more the Fed can push down rates. A stronger economy, especially in housing, reduces the expected length of time of QE Infinity and raises inflation expectations. The Fed could be pushing against the markets and that would make its job of reducing longer-term rates a whole lot more difficult. 


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