INDICATOR: November Housing Starts, December Philadelphia Fed Manufacturing Index and Weekly Jobless Claims

KEY DATA: Starts: +1.2%; 1-Family: +0.4%; Permits: +6.2%; 1-Family: +1.3%/ Phila. Fed (Man.): -15.2 points; Orders: -35.6 points; Expectations: -4.1 points/ Claims: +23,000

IN A NUTSHELL: “It’s nice that housing remains robust, but we need a lot more than one strong sector to keep the economy from stalling.”

WHAT IT MEANS: Sometimes, fear can be a good thing. Take the situation in housing. New construction activity continues to soar as people are looking to get out of cities and into lower density locations. The historically low mortgage rates are providing the support to make that happen. So, it was not a shock to see housing starts move up again in November. Over the last few months, starts have rivalled the level levels we saw in the final portion of 2006 - when the bubble was in the process of bursting. Then we were going down. Now we are seeing building accelerate. Are we headed toward a new bubble? Not necessarily. Yes, the surge in permits points to even a greater level of starts in the months to come. But this is not a situation where all you had to do was fog a mirror to get a mortgage. This is, at least in no small part, the result of households changing location preferences and that doesn’t mean there is overbuilding. However, it could and likely does mean a restructuring of prices as demand falls in the suddenly less-desirable locations but rises in the now more preferred places.

The manufacturing sector, which rebounded with the reopening of the economy, may be slowing down, or at least not expanding nearly as quickly. The Philadelphia Fed’s Manufacturing index cratered in early December, led by a massive slowdown in new order growth. Backlogs are barely increasing and hiring is softening. Looking outward, firms are still pretty optimistic. While they may have moderated their current additions to payrolls, they are still expecting to hire at a pretty solid pace in the months to come.

With shutdowns come layoffs and that means unemployment claims should rise. And they did last week. The level is back to early September and don’t be surprised, given the surge in virus cases, hospitalizations and deaths and the resulting the new restrictions being put into place, if we don’t see new claims surge back above one million. It bottomed at just over seven hundred thousand in early November but has been on the rise since.

IMPLICATIONS: As I have argued for many months, the fourth quarter is likely to be the transition quarter that moves us from shutdown/reopening to trend growth. The only question is how slow will be go? While GDP should be pretty solid this quarter, it’s more the math than the reality. The huge rise over the summer put the economy on decent footing, but except for housing, there hasn’t been much of an increase over the September numbers. And with the major closings in cities and California’s stay home orders, things could look a lot worse with the December data. That doesn’t set us up for a very good first quarter, especially if people continue to ignore basic practices that would limit the spread. Holiday gatherings could lead to an even further uptick in cases and restrictions in early 2021. But it does look like Congress will pass a “skinny” stimulus package that will have to be revisited once Biden takes over. Whether there is more help, or the economy is largely left to its own, as some want to do, will likely be decided by the Georgia elections. In the interim, we can only guess about the medium-term damage done by the pandemic. The Fed seems to think it was significant as the FOMC signaled yesterday it would likely not raise rates for the next three years and would aggressively buy securities “until substantial further progress has been made toward the Committee's maximum employment and price stability goals”. It wants everyone to know that that they are in it no matter how much money it takes to win it. That means investors now can be comfortable that the Fed has their backs for a long time.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.