Slump in Housing Starts Leaves U.S. Looking for Growth Drivers

  • Construction began on fewest homes last month since October
  • Cool consumer spending, weak manufacturing add to hurdles

A slump in housing starts in March has left the U.S. economy with few obvious drivers to power a rebound from what’s turning out to be a weak first quarter.

Construction began on 1.09 million homes at an annual rate last month, down 8.8 percent from February and the fewest in five months, figures from the Commerce Department showed Tuesday in Washington. Building permits, a proxy for work in the next month or two, also unexpectedly declined, making a quick snap-back in activity less likely.  

“The housing recovery seems stuck in neutral,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who had forecast a decline. “We’ve seen strength in the labor market, improvement in consumer confidence, yet the housing recovery has been in low gear.”

Recent reports have shown sluggishness in March retail sales and factory production, indicating consumer spending and manufacturing also ended the first quarter on shaky ground. While the slowdown can be traced to the effects of the turmoil that rocked financial markets at the start of 2016, sustained weakness will be more difficult to explain now that stocks have rebounded, employment continues to grow and interest rates remain low.

The housing starts data suggest homebuilding will go from showing an 11 percent increase at an annual rate in the first quarter to a 2 percent decline from April through June, according to estimates by Ted Wieseman, an economist at Morgan Stanley in New York. “That adds to early indications not pointing to much improvement” in gross domestic product this quarter following an average gain of about 1 percent over the prior six months, he wrote in a research note. 

Building permits issued last month decreased 7.7 percent to a 1.09 million annualized rate, the lowest in a year, according to Tuesday’s Commerce Department figures. That leaves little scope for a turnaround to develop by mid-year.

The drop in starts was broad-based, with three of four regions retreating last month and single-family projects slumping along with multifamily, which are notoriously volatile. The drop in one-family quashed some of the optimism that had emerged after a surge in February drove activity to the highest level in more than eight years.

Given the dearth of growth drivers, the second quarter will probably be more about diminishing headwinds rather than outright strength in GDP, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

A less-strong dollar should help support exports and stabilize manufacturing, and reductions in inventories that have already taken place mean factory production will find its footing, Feroli said. In addition, investment in the energy patch will probably stop plunging since there is not much more that can be cut, he said.

“It’s more a story of fading drags rather than any sort of new growth driver,” he said. “It’s not great, but we think the second quarter will probably look better.”

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