The housing market reached what might be thought of as a new post-recession milestone last month, and for all the right reasons, the Census Bureau reports. The takeaway here: The idea that the economy is caught in a fatal swoon just took another blow with today’s numbers. What’s more, there’s reason to wonder if growth is set to pick up a bit for the economy overall, an outlook that’s supported by my latest nowcasts of Q3:2012 GDP (I’ll have an update later today). That’s also the message in the September profile for economic and financial data, as summarized by The Capital Spectator Economic Trend Index (I’ll update CS-ETI today as well). Today’s housing numbers certainly don’t offer any reason to think otherwise.
Housing starts rose to an annualized rate of 872,000 last month, up a strong 15% from August. More of the same appears to be on tap, based on the nearly 12% gain in newly issued building permits for private housing in September.
More importantly, the year-over-year percentage change in starts and permits continues to rise at a healthy pace. Permits are up a sizzling 45% from a year ago (a new post-recession high for the annual rate of change) and the trend in starts is almost as strong, posting a 35% increase in September vs. a year earlier.
The fact that housing has continued to recover is a persuasive signal for expecting that the economy will continue to grow. Housing per se accounts for a relatively small share of GDP, but it’s widely known that the so-called multiplier effect from housing is quite powerful. New home construction generates a wide array of jobs, starting with the building of the structures. The effects ripple through the economy for months after a home is built and sold as the new owners purchase appliances, furniture, etc.
The fact that interest rates in general, and mortgage rates in particular, are at or near all-time lows only strengthens the case for expecting that September’s housing data reflects a trend with legs. Is this good news surprising? Perhaps, but as far back as December 2011 I discussed some of clues that suggested that the housing market was finally poised for a rebound. What’s clear now is that the rebound is unfolding. Yes, tomorrow’s unknown unknown may derail the trend. But if you’re looking for a convincing sign that the economy isn’t deteriorating, today’s housing update is a compelling piece of evidence.
In fact, the signs that the U.S. economy was headed over the cliff into a new recession have been minimal all along. Cherry-picking a few data points and/or focusing too much on the short term changes apparently tripped up some analysts. Others may have been blinded by overly complex models that suffered from overfitting the data. But a clear review of a broad data set looked convincing for thinking that slow growth would prevail. Back in June, for instance, I made the case that the odds of a new downturn appeared low, based on a precursor to CS-ETI. That’s remained clear in the following months, and September’s profile (as I’ll discuss later today) still looks strong enough to seriously doubt the claims from some corners that a new recession has either started or is about to strike at any moment. To be clear, this isn’t my subjective view; rather, it’s what the numbers tell us, based on a broad read of economic and financial indicators.
Yes, all the usual caveats apply, starting with the fact that there are still plenty of risks lurking that could bring trouble in the near-term future. If so, that’s trouble that’s not reflected in the numbers in hand today. At the top of the list of potential catalysts for turmoil down the road:
* Congress allows fiscal cliff risk to drag us over the edge
* The slowdown in emerging markets deepens
* The euro crisis takes (another) turn for the worse
* One or more of the various hot spots in the Middle East deteriorate and send energy prices skyrocketing
If and when the U.S. cycle takes a convincing turn for the worse, it’ll be clear in the numbers, and increasingly so. And, yes, you’ll read about the change in the trend here. Meantime, if we’re judging the business cycle now, using the latest numbers available, the cries to run for cover continue to look premature. Tomorrow, of course, as Scarlett famously observed, is another day.