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Weekly Economic and Financial Commentary: A Pretty Good Start to the Year

U.S. Review

2020 Is Off to a Good Start

  • Most of this week’s economic reports showed the economy ended 2019 with strong momentum, while the Senate passage of the USMCA and the signing of Phase I of the China trade deal reduce some of the uncertainty hanging over the outlook.
  • Mild weather helped housing starts surge 16.9% in December to a 1.61 million-unit pace, the highest in 13 years.
  • Manufacturing surveys from the New York Fed and Philadelphia Fed both rose more than expected in December.
  • December retail sales were soft, with a 0.5% gain in core retail sales offset by downward revisions to the prior two months.

A Pretty Good Start to the Year

This morning’s much stronger-than-expected rise in housing starts capped off a very good week for the economy. Housing starts surged 16.9% to a 1.61 million-unit pace, the highest level since December 2006. Big jumps like this are not unusual for December. The seasonal adjustment factors are huge and unseasonably mild weather, as we had this past month, can often lead to exaggerated jumps in the seasonally adjusted data. There is also a tendency for multifamily starts to surge at year-end, as apartment developers race to begin projects ahead of new legislative mandates.

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December’s data appear to have been impacted by both forces. Single-family starts jumped 11.2% to a 1.06 million-unit pace, the highest since July 2007. Multifamily starts surged an even stronger 29.8% to a 553,000-unit pace, a 33-year high. Permits, which are less impacted by temporary market distortions, fell in December, with single-family down 0.5% and multifamily down 9.6%. The level of construction for both single-family and apartments, however, has been strong for the entire second half of 2019, which means that even if activity stabilizes at recent levels, we would still see sizable year-over-year gains to start 2020. Moreover, we expect to see continued gains—the NAHB index, a measure of homebuilder optimism, held near a 20-year high in December.

We also got some positive signs from the manufacturing sector. While industrial production fell 0.3%, that was entirely due to unseasonably warm weather dragging on utilities output. Manufacturing output exceeded expectations, rising 0.2%. Aside from the GM strike and Boeing’s issues with the 737 MAX, the factory sector is showing signs of stabilizing amid a nascent rebound in global industrial output and some more positive developments in trade policy. Domestic manufacturing surveys are already beginning to reflect this, with the New York Fed (4.8 vs. 3.6 expected) and Philly Fed (17.0 vs. 3.8 expected) both rising more than expected in January. The improvement in the regional surveys should eventually show up in the national ISM survey.

Elsewhere in survey evidence, the NFIB small business index dipped slightly to 102.7 in December, but owners generally remain optimistic and expect improved economic conditions in coming months. The trade deal will likely boost confidence going forward, while impeachment proceedings may weigh on the January data. Owners are still seeing solid sales, which was reflected, to some extent, in the December retail sales report, which showed sales up 0.3%. Downward revisions took some of the shine off the report and meant that 2019 holiday sales were up 4.1% year-over-year, slightly below our expectation. Final data for the holiday period are still a few months away. Strength in control group sales gives us confidence in our Q4 PCE forecast of 2.1%–a slowdown, to be sure, but still well above most initial forecasts for the period.

Inflation, meanwhile, remains relatively tame. The CPI rose 0.2% in December, pushing the year-over-year change to 2.3%. The core CPI is also up 2.3% year-over-year. The Fed’s preferred measure— the core PCE deflator—remains stuck at 1.6%. Low inflation provides the Fed some leeway to maintain an easier monetary policy in place, and expect the Fed to remain on hold this year.