July Residential Construction, Industrial Production

  • Housing Starts for July dipped by 1.5 percent to a 604,000 unit annual pace.
  • Permits for new residential construction declined by 3.2 percent to a 597,000 unit pace.
  • Industrial Production ramped up in July by 0.9 percent as auto production rebounded.
  • Capacity Utilization increased to a still-slack 77.5 percent.

Today’s economic data confirms that residential construction will not provide much of a boost to headline growth this year. However, industrial production rebounded in July, supplying a counterbalance to the drag from recent financial market volatility. The key concern for manufacturing output is the sustainability of the July surge in vehicle production. Vehicle sales increased to a 12.2 million unit pace in July and still have much upside potential given significant pent-up demand. But consumer confidence took a hit in August as the political spectacle intensified and Standard and Poors downgraded their ratings on U.S. debt and other instruments. The University of Michigan Consumer Sentiment Index plunged to a recessionary 54.9 in August, well down from a recent high of 77.5 from last February. The pace of new residential construction eased in July as total housing starts pulled back from the 613,000 unit mini-surge in June, to a 604,000 unit pace in July. June’s jump to 613,000 now looks like a rebound from bad weather earlier in the year, and so will not be sustained in the near term. Further evidence of a retreat back to a near-600,000 unit building pace comes from building permits which dialed back to a 597,000 unit pace in July.  The multifamily side of the market appears relatively stronger than the single-family segment with multifamily starts increasing by 6.3 percent in July.  Rents have been firming as vacancy rates for multifamily units have tightened up in many areas. However, multifamily construction numbers tend to be somewhat volatile and so it remains to be seen whether recent gains in multifamily construction activity will be sustained. Single-family starts declined by 4.9 percent in July.

Industrial production ramped up in July by 0.9 percent as auto production rebounded from earlier supply chain bottlenecks and utility output surged with the very hot July weather in the South and Southwest. Manufacturing output increased by 0.6 percent for the month as motor vehicle production increased by 5.2 percent. Data for motor vehicle assemblies shows an increase from a 7.89 million unit annual rate in June to 8.73 million units in July, with most of the gain coming from light truck production. Electric utility production increased by 3.4 percent in July (all numbers seasonally adjusted). Capacity utilization tightened up in July to 77.5 percent. Many industries are running tighter than the headline number which is held down by ample slack in the auto sector.

Market Reaction: Equity markets opened with losses and remain down. Treasury yields are down. Oil is down to $86.01/barrel. The dollar is giving ground against the yen and gaining on the euro.

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