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Construction data supports second quarter growth

​​​​​Construction data continues to support our view of stronger second quarter growth

The data released last week continued to support our belief that growth in the second quarter was stronger than the first quarter. The main data points, housing starts and permits for June, both surged. Housing starts exceeded not only the upwardly revised actual data for May but also expectations for June, coming in well above both. Housing permits also jumped, exceeding expectations by a wide margin. The increases for June follow a few consecutive months of declines. 

Housing construction continues to trend upward, but in a fits-and-starts manner with stronger months often followed by weaker months.

Nonetheless, the overall trend remains upward. Housing starts have averaged a roughly 1.201 million annual rate so far this year, up from an annualized average of 1.177 million last year. Likewise, housing permits have averaged a roughly 1.238 million rate so far this year, up from an annualized average of 1.207 million last year. Importantly, single-family starts are now leading the charge. For most of the recovery within the housing market, it's been multifamily that's led the charge, resulting in a notable and well-publicized lack of affordable, entry-level for-sale housing.

Construction implications for the apartment market

The surge in single-family construction should not imply that multifamily construction is declining. At worst, multifamily starts and permits are holding steady. Completions in the apartment sector remained elevated over the last few years. With construction and net absorption largely in balance, the national vacancy rate changed very little between 2013 and mid-2017. 

We continue to believe that 2017 will be the high watermark for apartment construction during this phase of the cycle, which should put some modest upward pressure on the national vacancy rate. 

Completions should moderate after this year, bringing construction and absorption back into balance.

Housing also offers a warning about policy

But the housing data last week also presented a warning about the potential impact of government policy. The monthly housing market index (HMI) in the National Association of Home Builders survey declined in early July, falling to its lowest level since November 2016 before the election. It's believed that the index rose after the election because of surging optimism that the administration would roll back regulations that have increased the cost of building. The index reached its recent high in March after the administration repealed water-related environmental regulations.

Yet despite the positive data on starts and permits, the index has been declining in recent months as home builders have grown increasingly concerned with rising prices for construction materials. The key culprit has been timber prices, largely due to government policy, not pure market competition for scarce resources. In May the administration announced new tariffs of up to 24 percent on imported Canadian lumber. This has caused the price of framing lumber to spike, making it more difficult to build profitably. In addition, the market expects more tariffs on imported building materials to be announced in the coming months. As we have mentioned in the past, the administration sets trade policy, often with little to no oversight from Congress. That enables the administration to easily set trade policy that is politically expedient, but potentially damaging to the economy and markets.

Second quarter GDP growth and Fed meeting lead a busy week

The initial estimate for second quarter real GDP growth will be released on Friday. 

We expect growth in the 2.5 percent to 3.0 percent range, a significant improvement from the 1.4 percent growth rate from the first quarter. 

Such a reading would bring growth during the first half of the year to somewhere around 2 percent at an annualized rate. That would roughly match the 2.1 percent average annualized rate of growth since the economy began expanding in the middle of 2009. Although optimism for faster growth spiked after the election, the absence of any substantial fiscal policy changes this year has prevented faster growth. The release will officially mark the end of the economic expansion's eighth year, fully cementing it as the third-longest expansion in U.S. history.

The Fed will hold its next meeting July 25-26. Rates are expected to remain unchanged, although there is a slim chance that the Fed could announce the start date for their balance sheet normalization plan. We believe the announcement will not arrive until after the summer once the Fed has a chance to see how trends in wages, inflation, and consumer spending unfold. The focus this week will be on the policy statement's language, especially regarding inflation which has been moderating in recent months and putting the potential third rate hike for this year in doubt.

Thought of the week

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