Housing Continues to Build Momentum

Even a very wet January couldn't keep those starts down.
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Not Feeling Gravity's Pull

JACKSON HOLE, Wyo. -- Housing refuses to die.

This despite repeated wishes for exactly such a tragedy. One crack forecasting unit -- from an American brokerage, initials

Merrill Lynch

-- has been promising a housing slowdown since September 1997. Everything from demographics to share-price blips to sun spots have been cited as reasons to expect softer housing numbers any month now.

Whatever.

Housing starts

vaulted another 3.8% in January on top of a 5.1% surge in December. Remember that unusually kind winter weather that "artificially" boosted starts two months ago? Its reversal last month -- it was

exceptionally

wet in January, and the weather weenies have the

National Weather Service

statistics to prove it -- was supposed to smack starts back down.

Uh-huh.

Starts rose 3.7% during the fourth quarter of 1998. That translated into a 10.1% increase in residential investment in the

National Income and Product Accounts

data; that, in turn, contributed 0.44 of the 5.6 percentage points by which

gross domestic product

ended up rising.

Even factoring in a net drag for the remaining two months of the quarter -- go ahead and assume that starts drop 4% in February and do nothing in March, like the weenies will do -- starts will post a 3.3% first-quarter increase thanks to a superb January. That works out to a 0.39-percentage-point GDP contribution. (If help of that order fails to impress you, consider that housing contributed only 0.29 percentage point to growth in 1996 and just 0.10 point in 1997.)

And that's including a ridiculous assumption about February-March.

Building permits

-- the best gauge of starts in the future -- vaulted another 2.8% in January on top of a 4.4% surge in December. Given the three- to four-month lag through which permits morph into starts, housing's contribution to growth will (again) surprise most folks on the up side both this quarter and next.

Quit It Already!

Industrial production

was

unchanged in January. But note that the headline number reflected a 0.1% increase in manufacturing output, which accounts for 88.53% of total IP, a 0.2% increase in utilities output, which accounts for 6.27% of total IP, and a 1.8% plunge in mining output, which accounts for 5.20% of total IP.

Four notes about the release.

  • Manufacturing output has graduated from the intensive-care unit. It fell during four of the eight months between February and September 1998, but it has since posted four straight increases. The fact that production in this industry group is eking out only modest increases is not the point; the fact that it is no longer falling outright is.
  • The good news is that the production of computer and office equipment is still growing at a 50.8% (!) year-on-year rate and that the production of information processing and related equipment is still growing at a 13.7% year-on-year rate. The "bad" news is that production in these areas grew 54.9% and 14.4% (respectively) between the fourth quarter of 1997 and the fourth quarter of 1998. The January numbers thus mark a deceleration -- a very modest one, and one that comes from a very high base, but a deceleration nonetheless.
  • Total industrial production is growing at a 1.7% year-on-year rate; total industrial capacity is growing at a 4.9% year-on-year rate. The latter has been growing more quickly than the former for most of the past 14 months, and capacity utilization has fallen to 80.5% in January from 83.4% in December 1997 as a result.
  • If excess capacity does represent the biggest obstacle keeping firms from even trying to raise prices, is it not a bit odd that they refuse to quit growing the stuff? True, capacity growth peaked at a 5.8% annual rate back during the second quarter of 1996. But consider the latest six quarterly increases (beginning in the fourth quarter and moving backward, 4.8%, 4.8%, 5.0%, 4.9%, 4.8% and 4.9%); note that a first-quarter increase of 4.6% is a safe bet; and recall that such increases amounted to half of what they do now as recently as 1993. So? Why no slowdown? Is the current pace of building now pretty much necessary, or is the cost of adding just too cheap to pass up? Your narrator would love to hear from some of the manufacturing types -- Toyota Guy? Rail Guy? Chip Chick? -- he knows are in the audience on this one.

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