Headline numbers suggest economic weakness; economists see silver lining

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While the economic indicators released on Thursday suggested a weakening economy, a deeper dive by analysts offers a different view.

Housing starts fell 9.4% in September to a seasonally adjusted 1.256 million annual pace from 1.386 million in August. Building permits dropped 2.7% to 1.387 million in September from 1.425 million in August, the Commerce Department said.

The decline was fueled by a 28.2% drop to 338,000 in the pace of multifamily housing starts.

"Multifamily housing starts fell from an unsustainably high level in August and are running at a solid pace despite the sharp monthly decline," according to NAHB Chief Economist Robert Dietz. "Meanwhile, the rebound for single-family construction continues. Single-family permits have increased since April, and single-family starts have posted gains since May. In another positive development, September marked the first monthly increase for the number of single-family homes currently under construction since January."

Although “single-family starts remained robust, increasing slightly to a pace of 918,000 units — the highest since May 2019,” Joel Kan, Mortgage Bankers Association associate vice president of economic and industry forecasting, said, “the increase in single-family starts was solely concentrated in the South. Most of the country still needs more new construction to meet job growth and demand. It is promising that single-family permits continued to rise, increasing for the fifth consecutive month.”

“The recovery in housing has been frustratingly slow — housing starts are still only back at mid-1990s levels despite its recent gains,” Mickey Levy, Berenberg Capital Markets' chief economist for the U.S. Americas and Asia, and U.S. Economist Roiana Reid, write in a note. “We estimate that starts around 1,500k annually is necessary to meet demand. As always, we caution that the housing recovery will continue to be choppy.”

Single-family housing starts should continue rising “as younger households transition from renting to buying,” they write. “We expect residential fixed investment to increase in Q3 for the first time since Q4 2017. Housing starts and new and existing home sales have benefited significantly from the decline in mortgage interest rates from near 5% late last year. Demand for new housing units is being supported by declining housing inventory (new and existing), continued job growth and rising inflation-adjusted incomes, and favorable demographics.”

The Federal Reserve Bank of Philadelphia’s general business conditions index fell to 5.6 in October from 12.0 in September, while the future general business conditions index rose to 33.8 from 20.8.

Economists polled by IFR Markets expected the main index to fall to 8.0.

The prices paid index dropped to 16.8 from 33.0, while the prices received declined to 16.4 from 20.8.

“The ISM-adjusted index for the Philadelphia Fed manufacturing survey (average of new orders, shipments, employment, supplier deliveries, and inventories subindexes), which better reflects underlying manufacturing conditions than the headline that is based off a single question, declined by 0.6 pts to 58.7, remaining solidly in expansion territory,” Levy and Reid write. “This suggests that manufacturing conditions in the Philadelphia region are much better than suggested by the headline index. Indeed, the new orders index increased by 1.4 pts to 26.2, the highest since May 2018; the unfilled orders index increased by 1.2 pts to 18.8, the second highest level since August 1983; and the shipments index declined by 7.5 pts to 18.9, which is a solid level.”

The positive signs “suggest that manufacturing conditions nationally may soon stabilize.”

The Federal Reserve reported industrial production slipped 0.4% in September after rising 0.8% in August. In the third quarter, production grew at a 1.2% annual rate, after falling about 2% in each of the prior two quarters.

Manufacturing production declined 0.5% in the month, with the strike at GM hurting production. Mining production dropped 1.3%, while utilities’ output gained 1.4%.

Capacity utilization slid to 77.5 in September from 77.9 in August.

“Manufacturing production excluding motor vehicles, a reliable gauge of underlying demand, increased in Q3 (0.7% q/q annualized) for the first time since Q4 2018 but remains 1% below its peak,” Levy and Reid noted. “This suggests that manufacturing activity is bottoming out but is likely to remain sluggish in the intermediate run.”

Economists expected production to dip 0.1% and capacity utilization of 77.7%.

Initial jobless claims rose to 214,000 in the week ended Oct. 12 from 210,000 in the prior week.

Continued claims fell to 1.679 million in the week ended Oct. 5 from 1.689 million the week before.

Economists expected 215,000 claims in the week.

"The weakening economic data certainly points toward further Fed rate cuts," said Robert Johnson, professor of finance at Heider College of Business at Creighton University. "But, we need to keep in mind that while the data points to a slowing economy, it does not appear that a recession is imminent. Further positive movements in the Chinese trade talks would serve to boost U.S. economic prospects."

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Economic indicators Jobless claims Housing Manufacturing industry Federal Reserve Federal Reserve Bank of Philadelphia
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