Summary for Week Ending August 17th

The economic data was a little more upbeat this week. Retail sales were up sharply in July (reversing the decline in June), housing starts were solid (running about 20% ahead of last year), industrial production increased, the 4-week for initial unemployment claims was near the post-recession low, homebuilder confidence improved, and even consumer sentiment ticked up a little.

Recently the most positive data has been housing related and I wrote this week: Even though housing starts are increasing, it is from a very low level, and 2012 will still be one of the worst years for housing starts (only 2009, 2010, and 2011 will be worse). Still, even with these weak sales, this is good news for the economy: housing starts are on pace to be up 20% from last year (how many sectors are growing 20% this year?), and housing starts could double again over the next several years.

This reminds me of the recovery for auto sales. Auto sales bottomed in February 2009 at close to a 9 million annual sales rate. Now auto sales are running at a 14 million pace; over a 50% increase. That strong increase in auto sales really contributed to GDP growth over the last few years, see from Cardiff Garcia at FT Alphaville: Car-driven GDP growth.

Now we are starting to see a rebound for housing. And housing will have an even larger impact on GDP and employment growth than autos; and housing will probably double from here (more than the 50% increase for autos). Barring policy mistakes in the US and Europe (a big IF), this improvement for housing suggests the economy will continue to grow. However the recovery in housing will probably be gradual.

Here is the take from Merrill Lynch on the economic impact of the housing recovery:

The housing market has become a bright spot for the US economy, offering glimmers of hope for a stronger recovery. The good news is that housing should provide a boost to the economy this year. The bad news is that it will likely be insufficient to save the rest of the economy. While we believe that the housing market has decidedly turned a corner and the recovery has begun, we think it will be a gradual recovery.

Note: Merrill think GDP growth will slow over the next few quarters and remain sluggish through next year.

Here is a summary of last week in graphs:

' Housing Starts declined to 746 thousand in July

Click on graph for larger image.

Total housing starts were at 746 thousand (SAAR) in July, down 1.1% from the revised June rate of 754 thousand (SAAR). Note that June was revised from 760 thousand.

Single-family starts decreased 6.5% to 502 thousand in July.

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after moving sideways for about two years and a half years.

Total starts are up 56% from the bottom start rate, and single family starts are up 42% from the low.

This was slightly below expectations of 750 thousand starts in July, but the key is starts are up solidly from last year. Right now starts are on pace to be up about 20% from 2011. Also note that total permits were at the highest level since 2008.