Summary for Week ending January 18th

Most of the data released last week was encouraging. Housing starts were up 28% annually in 2012 - a strong increase, and starts are still very low - and that suggests further increases for starts over the next few years and is good news for the economy. Note: There is a strong seasonal adjustment for housing starts in December (typically a slow month), so I'd use the monthly sales rate with caution - but the annual increase was solid.

There were other positive reports: retail sales in December were stronger than expected, industrial production increased, and weekly unemployment claims fell sharply (although there are strong seasonal adjustments in January).  Still, the 4-week average of initial weekly unemployment claims is near the post-recession low.

On the negative side, both the NY Fed (Empire State) and Philly Fed manufacturing indexes indicated contraction in January.  Even though housing is picking up, manufacturing remains weak.  Another negative was consumer sentiment - probably being impacted by Congress (maybe by the payroll tax increase too) - but it now appears that Congress will pay the bills, so sentiment will probably improve.

It appears that economic growth is picking up, although the fiscal agreement will mean a drag of 1.5 to 2.0 percentage points on GDP growth in 2013 - so we should expect another year of sluggish growth.

Finally, I heard one analyst on CNBC ask why the Fed is staying so accommodative even with a pickup in growth.  The answer is simple: the unemployment rate is 7.8% (very high), and inflation is below the Fed's target (see graph below). 

And here is a summary of last week in graphs:

' Housing Starts increase sharply to 954 thousand SAAR in December

Click on graph for larger image.

Total housing starts were at 954 thousand (SAAR) in December, up 12.1% from the revised November rate of 851 thousand (SAAR). This was well above expectations of 887 thousand starts in December.

Housing starts increased 28.1% in 2012 and even after the sharp increase, the 780 thousand housing starts last year were the fourth lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011).   This was also the fourth lowest year for single family starts since 1959.

Starts averaged 1.5 million per year from 1959 through 2000.  Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 annual level.

Since residential investment and housing starts are usually the best leading indicator for economy, this suggests the economy will continue to grow over the next couple of years.