Weak Housing Construction Suggests Softer US Growth Ahead

New residential housing construction was surprisingly weak in December, presenting more evidence for assuming that the US economic growth will continue to slow. Housing permits perked up, providing a degree of optimism for expecting that building activity will rebound in the months ahead. But reviewing both indicators on a rolling one-year basis suggests that the housing trend has weakened — a trend that will create headwinds for the US economy in the months ahead.

Housing starts fell 10.9% in December vs. the year-earlier level – the biggest annual decline since September 2016. The annual change in housing permits – a leading indicator for construction activity – is stronger, but the fractional 0.5% rise reflects a flat trend.

Nonetheless, some analysts are encouraged by the stronger permit data in recent months. The pullback in interest rates is a plus, too, notes Daniel Silver, an economist at JP Morgan. “We do expect the housing data to pick up at some point in response to the recent decline in mortgage rates, but it likely will take some time before we start to see firming across many of the relevant figures.”

Perhaps, but the weakness in housing is hardly a new development. Rather, the sector has been reflecting a downside bias for months and the yesterday’s update confirms that the downside bias continues to unfold. Last month, for instance, The Capital Spectator wondered if housing was set to become a headwind for US economy in 2019 – a topic inspired by falling sales of existing homes and a negative annual trend for pending home sales, a leading indicator for sales activity.

Recall, too, that last summer – when the economic growth was considerably stronger – the housing data was looking sufficiently soft to ask: “Is The Housing Market Signaling Trouble Ahead For US Economy?”

Seven months later, economic growth has slowed and tomorrow’s release of the gross domestic product for last year’s fourth quarter is expected to show that the downshift rolls on. Econoday.com’s consensus forecast for Q4 GDP calls for a 2.2% increase (seasonally adjusted annual rate). If correct, economic output will post a second straight quarter of softer growth.

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