InvestorCentric: Latest Economic Data Support Prospects Of A Housing Recovery

James Picerno from The Capital Spectator believes that positive indicators, like improving housing starts and growing consumer spending, provide evidence that the housing recovery is underway. However, the healing has just begun and there are several unknowns that make it unclear whether the early-stage recovery has legs. See the following post from The Capital Spectator.

With each new data point, it’s clear that the economy is no longer contracting. The signs have been bubbling for months, and today’s update on new housing starts and building permits offers another round of statistical support. But while it’s tempting to conclude that the economy’s poised for a robust, sustained run of growth, that’s still premature. As we’ve been discussing for much of the past year, the time gap between the end of economic contraction and economic growth is likely to be longer this time. In turn, that means that the recovery is vulnerable to a fresh bout of weakness once the initial bounce fades. That's not fate, of course, but neither is it far beyond the pale of possibilities, given the breadth and depth of the Great Recession's lingering complications.

But first the good news of the day. Housing starts rose 1.6% last month over February and are higher by 20% compared with a year ago, the Census Bureau reports. An even stronger rebound describes the trend in new building permits issued for March, which climbed 7.5% over the previous month and are up more than 34% vs. a year ago. The permits trend is especially encouraging because it’s a forward-looking indicator that tells us that confidence is returning for investing in housing construction.

In fact, housing overall is thought to offer valuable clues about future consumption and its relationship to the economy. “Why is the level of single-family housing starts such an excellent barometer of the health of the consumer sector?” asks Richard Yamarone in The Trader's Guide to Key Economic Indicators. "Simply put, when people are concerned about their economic situation, they may still spend on other products, but they won’t even consider buying homes," he advises. On the other hand, if housing is doing well, homeowners are likely to spend more at the margins.

No wonder, since housing generally dominates household balance sheets and so it casts a long shadow over consumer sentiment. The fact that housing seems to be stable if not growing is a rather large bit of good news. These days, we’re looking for a recovery in the housing market, which was crushed, not only in the Great Recession but in a long bear market for housing that preceded the overall economy’s descent that started in December 2007.

After reading today’s housing report, it appears that all’s well, or at least better. The market’s recovering, and that suggests that consumers will resume their old habits of spending. Certainly the trend in retail sales of late suggests as much. Retail spending rose a strong 1.6% last month, the government reported earlier in the week. That’s the third straight month of higher sales. That implies that consumer spending is rebounding, a critical factor in the U.S. economy, which is based largely on consumption.

But before we make definitive declarations that all’s well, let’s consider the broad risk factor for the cycle. The main issue is recognizing that the economy is still bouncing back from a very deep fall. That’s encouraging if not inevitable in the grand scheme of cycles. No one should be surprised that the mother of all monetary and fiscal stimulus programs in the history of the United States has delivered a reaction—a positive reaction—in economic activity. Indeed, our broad economic indices published in The Beta Investment Report have been signaling recovery for some time, as the chart below shows.

The question is whether the initial rebound has legs? In other words, how much of the recovery so far is due to government intervention vs. a self-sustaining recovery in the private sector? The answer is always obscure, of course, but it’s a safe bet that a bit of both are relevant at the moment. Meantime, let’s also note that government support for housing is winding down, along with the likelihood that other government props will fade in the coming months.

That doesn’t mean that the economy’s headed for a fresh round of contraction. Nonetheless, it’s unclear just how much growth is coming in an economy that has stabilized but still suffers on a number of levels. The housing market is looking better, and today's numbers help minimize the fear that housing is the "other big problem." But optimism shines brightest only in terms of comparisons with the recent past, which is about as ugly as housing can get without completely imploding. We wonder how year-over-year comparisons will look in 2011, when the year-earlier baseline is much higher.

"Some of the worries about the housing market have been alleviated by this report," Cary Leahey, an economist at Decision Economics, tells Reuters today. We agree. But as our first chart above reminds, we’ve only just recently begun the healing process. If it continues, and the labor market shows sustainable growth, and inflation stays moderate, and the eventual increase in interest rates doesn’t derail the still-fragile state of consumer sentiment, the future looks encouraging. There’s a lot of “ifs” to step over. We’re beginning to walk, but we’re still a long way from running.