Today’s updates on housing construction and industrial production for March bring mostly good news for growth, but with some caveats. First the good news: housing starts climbed more than expected, rising to the highest levels since 2008. Industrial production also increased last month, advancing 0.4% and beating expectations slightly. But the generally upbeat news was tempered by the downturn in new housing permits in March and a modest slide in the manufacturing component of industrial output. What’s going on? Let’s sort it all out with a closer look at the numbers.
For residential construction, last month’s activity was clearly a robust signal that housing’s recovery rolls on. Starts pushed north of the 1,000 mark (on a seasonally adjusted annualized basis) for the first time in nearly five years. But the party may set to cool for a while, or so the drop in newly issued housing permits implies.
The divergence between rising starts and falling permits is especially stark when we look at rolling one-year changes for the two series. If permits are a reliable estimate of future construction activity, and they usually are, it seems safe to assume that the pace of growth for starts will cool in the months ahead. That doesn’t mean that the housing recovery has come to an end—far from it, or so the latest data suggests. But the softer side of permits in March hints at a slower rate of recovery for the near term.
As for industrial production, the headline index delivered a decent if not particularly impressive gain last month. Manufacturing, however, slipped a bit, echoing the deceleration in growth according to the ISM Manufacturing Index for March.
But the trend looks quite a bit stronger when we review industrial production on a year-over-year basis. Indeed, industrial output climbed 3.5% for the year through March—the fastest pace in eight months and a sign that the expansion in the industrial sector still has a head of steam.
Nonetheless, the wobbly numbers for retail sales and payrolls in March raise questions about the broad trend for the business cycle. There could be trouble brewing for the months ahead, but it’s still premature to assume the worst. One reason for reserving judgment arrived in last week’s encouraging jobless claims report, although we’ll need to see confirmation in Thursday’s update to take that number seriously.
Meantime, slow growth still looks like the path of least resistance, based on the numbers so far. Yes, March data is showing some signs of stress, but it’s not yet clear if this is another temporary bout of macro turbulence or the prelude to something darker. After reviewing today’s numbers, the worst you can say is that the March macro profile so far is mixed.
Then again, you can’t tell much from cherry-picking the data or obsessing over the last few data points. Perspective and context are essential for business cycle analysis. On that note, I’ll publish an update on the Economic Trend & Momentum indices later this week for a deeper read on where we’ve been, and what it implies for the near term. For now, the search for smoking guns that confirm the worst remains the stuff of bearish fantasies… at least until the numbers tell us otherwise.