Housing Starts and PPI

February 17th, 2016 10:37 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

January housing starts were a big disappointment, falling 3.8% to a 1.099 million unit annualized pace.  Single-family starts declined modestly for a second straight month after having surged in November.  Meanwhile, the volatile multi-unit sector also posted a modest fall in January, quite a surprise to me given that multi-unit permits ran far above starts late last year, pointing to a looming pop in starts.  It is difficult to say if weather conditions dampened building activity in January, though one would imagine that they would have been less of a factor this year than in the prior two Januarys.  In any case, the raw level of building activity in January is low, so the data are always subject to an unusual amount of seasonal noise/distortion.  I remain confident that the housing sector will have a good year in 2016, continuing solid growth that has been in place for several years, but I would like to see some better starts numbers over the next few months.  Anecdotally, builders are said to be ramping up for what they expect to be a healthy spring selling season, the best since the bust, so one would expect the starts data to reflect that going forward.

Meanwhile, the January PPI was considerably firmer than expected.  Energy prices sank, as anticipated, plunging by 5.0%, but most everything else was relatively firm.  Wholesale food prices jumped by 1.0% in January, while the core index rose by 0.4%.  A handful of categories drove the core surprise.  My first guess would have been the wholesale and retail trade margin categories, but they were mostly offsetting (up 1.2% and down 1.0% respectively).  Instead, the main culprit seems to be the financial sector, as wholesale prices (whatever that means) for both banking and investment services jumped.  Some pieces of the investment services category of the PPI are used to derive the corresponding components of the PCE deflator, so this could be notable.

I will scour through the PPI and take a look at any impact that the figures may have for my CPI forecast, in particular focusing on the food and energy components.  I will also need to look through the annual revisions to the CPI, which were also released at 8:30.  These revisions include the annual updating of weights in the CPI basket as well as recalculated seasonal factors.  The December core CPI reading was revised from +0.1% to +0.2%, presumably based on the new seasonals, in which case there should be an offsetting revision in some other month.  In any case, there is a lot to digest with regards to the CPI forecast, so I will have to provide a full update later.  Coming into today, I had expected a marginal decline in the headline figure, driven of course by energy, and a 0.2% increase in the core index.

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