Home Building Activity Posts New Record Low
Starts of new homes fell 15.5% in December to an annual rate of 550,000. The annual average of new homes started in 2008 is 902,000, the lowest on record. Starts of new single-family homes dropped 13.5% to an annual rate of 398,000, the lowest on record (see chart 1).
The peak-to-trough decline in housing starts, both total and single-family, is the largest on record since record keeping began for these series in 1959 (see table 1). The duration of the weakness in home construction (peak was in January 2006 – December 2008) is also the longest on record.
On a regional basis, there is a faint glimmer of hope in the Northeast because starts of new homes rose 12.7% in December, inclusive of a nearly 18.0% increase in single-family starts. Additional monthly gains will be necessary to confirm that home construction has turned the corner in this part of the nation. Housing starts posted declines in the other regions of the nation. The small 2.2% drop of housing starts in the West is also noteworthy compared with double-digit declines in the Midwest (-24.53%) and South (-22.2%).
Permits to build new homes fell 10.4% in December to an annual rate of 549,000, reflecting fewer permits issued for single-family units (-12.3%). Much like housing starts, permits issued for new homes have fallen sharply from the peak set in September 2005 such that the December readings are at new record lows (table 2). The large inventory of unsold new homes and the weakness in hiring implies that a pickup in home construction is most likely to reverse only later in the year as economic conditions improve.
Labor Market Situation Remains Grim
Initial jobless claims climbed back to 589,000 during the week ended January 17. The latest level reflects an increase of 119,000 claims in the last two weeks. Initial jobless claims declined by an identical number during the prior two weeks which contained holidays. These wide swings suggest a seasonal adjustment issue over the holidays. In any case, the main message is that the number of applicants filing for unemployment insurance is at a cycle high once again. Continuing claims, which lag initial claims by one week, advanced 97,000 to 4.607 million and the insured unemployment rate held steady at 3.4%.
Japan: No Sale!
Two items of significance regarding the Japanese market hit the wire this morning – the end-year trade balance and the Bank of Japan (BoJ) policy meeting announcement. With the overnight call rate already down to 0.10%, another rate cut would hardly be a news-maker, but the state of Japan’s exports usually makes the front page. And unfortunately, the news was not good. Nobody expected the export market to make a miraculous turnaround, but some hope existed for less erosion in overseas sales or fewer imports, thereby supporting net exports. Neither occurred. December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion.
To put that in perspective, net exports were 1.7% of GDP in 2007 – in 2008 this amount will barely reach 0.4%. Now consider that this collapse in trade all loaded into the tail-end of last year. This back-loading suggests that Japan’s Q4 GDP figure will be well beneath the sad Q3 tally of -0.5% on the quarter. We have said it before and we will say it again – our official forecast for Q4 GDP in Japan is ‘abysmal’.
On a final note, while the BoJ did not cut the overnight rate, it took action in the form of accepting real estate investment trust (REIT) debt as collateral for market operations. By opening up this new category for BoJ operations, the central bank effectively salvaged a section of the economy struggling to secure funds. This measure also opened the possibility that other debt categories could be included as collateral in the future, giving debt markets something to be happy about in a year that so far has brought little joy.
The BoJ also downgraded its GDP and inflation outlooks dramatically, but this came as little surprise. The central bank now believes the current recession (which started in April 2008) will last for a full eight quarters, and a deflationary environment will persist into 2011. This is hardly an upbeat forecast, but we think it is the most forthright the BoJ has been in some time. And at least for the next few quarters, we believe the data will confirm this outlook.
Brazil: 100 is the New 75
In a surprise to the majority of forecasters, Brazil’s central bank lowered its benchmark rate by a larger-than-expected 100bps on Wednesday after an official vote of 5-3 (the three voted for a 75 bp cut), bringing the overnight Selic rate down to 12.75%. This move was justified after a subdued inflation reading for December, but the committee’s main reason for the move was a significant deterioration in domestic conditions.
Industrial production registered a poor November, down 6.2% y-o-y, reflecting weak demand for its exports, which have been a main driver of the economy in recent years. Additionally, more than 650,000 formal jobs were lost in the month of November, signaling an inevitable drop in still-resilient consumer spending in the months to come.
And what is the source of all this domestic deterioration? Risk aversion. Once thought to be impervious to the global credit crisis, the economy has been suffering ever since that mother-of-all bank collapses – Lehman Brothers. As a result, investment has slowed to a near standstill, trade finance has become largely unattainable, and the Real has plunged some 34% against the dollar since its most recent peak. Investors in the developed world have fled these riskier emerging markets, and thus, the economy is seizing up because of the combination of lack of financing and external demand. Over the next few months, expect these external factors to have a more marked effect on domestic activity (i.e. plummeting consumer spending).
With two additional months of data at its next meeting on March 10-11, the monetary policy committee may have an even firmer foundation on which to justify a large reduction in its main policy rate. Given the extremes of the times, and the fact that the Real firmed after the cut (signaling a positive reception of deeper rate cuts by FX markets), we would venture to say that 100 is the new 75. In other words, expect to be surprised at how rapidly the Selic is lowered.
