July Residential Construction, August UI Claims, Regional Fed Surveys

Permits Hit Post-Recession High, Labor Data Positive, Regional Fed Surveys Not

• Housing Starts for July decreased by 1.1 percent to a 746,000 unit annual rate, after a strong June.
• July Permits for new residential construction increased by 6.8 percent to an 812,000 unit rate.
• Initial Claims for Unemployment Insurance gained 2,000, to hit 366,000, for the week ending August 11.
• The New York and Philadelphia Federal Reserve Banks reported weak August manufacturing surveys.

Residential real estate indicators are still improving despite the Q2 soft patch and unsettling signals from overseas. Housing starts for July did give back a little of their strong June gain, declining by 1.1 percent to an annual rate of 746,000 units. But permits for new construction roared ahead, up 6.8 percent in July, to reach an 812,000 unit rate, the most since August 2008. We are still at a very low level of residential construction by historical standards, and still well below the pace needed to match long-term household formations, which is around a million units a year.  If we factor in the replacement cycle for existing housing stock plus a positive income effect for second home purchases, the break-even rate of new home construction is in the range of 1.2 to 1.5 million homes per year. We are still at half that rate so there is clear upside potential for residential construction as long as economic fundamentals, such as job creation, remain on track.

Labor market indicators are holding up, suggesting that in the August payroll job numbers we will see more evidence of a step up from the weak Q2 payroll data. Initial claims for unemployment insurance for the week ending August 11 showed a minor gain of 2,000 to hit 366,000. The trend since mid-June still looks good. July payroll job gains were 163,000. In August we could see a number in the range of 120,000 to 140,000. Both the Federal Reserve Bank of New York and the Federal Reserve Bank of Philadelphia reported weak regional manufacturing conditions for August. The Empire State Manufacturing Survey fell into negative territory for the first time this year. The Philly Fed’s Business Outlook Survey showed ongoing weakening conditions with its fourth consecutive negative reading.

Market Reaction: Equity markets are up. Treasury yields are down at the long end of the yield curve. Oil is up to $94.50/barrel. The dollar is up against the yen and down versus the euro.