December 1, 2011
The U.S. economy is picking up. If only Europe were on the mend.
Chief Economist, CanaData
The news on the U.S. economy of late has turned decidedly more “chipper.”
Total housing starts in October were flat (-0.3%) compared with September, at 628,000 units seasonally adjusted and annualized, according to a joint press release of the U.S. Census Bureau and the Department of Housing and Urban Development.
The fact the level has stayed above 600,000 units is quite encouraging.
For much of the past three years, housing starts have wavered between 400,000 and 500,000 units. The results for October and September of this year have been beaten on only two other occasions during that time span — January, 2011 at 636,000 units and April, 2010 at 687,000.
One has to return to 2008 to find monthly numbers that were regularly higher.
The buzz in the media is that the U.S. rental market has picked up considerably. The latest numbers confirm this.
Multiple-unit starts so far this year have been nearly 50% stronger than during the first ten months of last year. In October alone, they were +88.6% when compared with October 2010.
Single-family starts were down 11.7% on a year-to-date basis in the latest month, versus January to October of last year. On a positive note, however, the extent of the year-to-date decline has been diminishing over the past six months.
Single-family starts in October alone were +3.9% versus October a year ago.
Compared with the first ten months of last year, the West is doing best (+5.4%), with the South as the only other region on the plus side (+0.6%).
The Northeast (-8.3%) and Midwest (-4.4%) are still in the negative column.
The latest data set contains more good news. Over the last couple of years, an increase in starts has often been accompanied by a decrease in residential building permits. In other words, what’s been “gifted” on the one hand has been taken away on the other.
Not so this time. The permit figure in October was +10.9% on a month-to-month basis and an even healthier +17.7% year over year.
Improvement in the U.S. labour market has been an almost clandestine affair. The number of jobs in the economy has been quietly sneaking forward. There have been 13 straight months of positive change.
The gain still remains low (+1.7 million) and the overall level is well short of where it was prior to the recession, but progress is being made just the same.
The latest initial jobless claims report indicates the momentum on the jobs front may be growing.
The 388,000 figure on first-time unemployment insurance seekers for the week ending November 12th was the lowest since April 2nd.
For almost the past four months, the initial jobless claims number has been down around the 400,000 benchmark. Achieving a number below 400,000 on a regular basis is a necessary pre-requisite for lowering the unemployment rate from its current high level of 9.0%.
Also on a cheerier note, the latest U.S. inflation rate must have been a relief to the Federal Reserve. At +3.5% for the Consumer Price Index (CPI) year over year, October’s reading backed off from September’s worrisome +3.9%.
The federal funds rate can stay near 0.00% with nary a concern that prices may be skyrocketing out of control, at least for now. All in all, the U.S. economy is shaking off its lethargy.
If only the European debt crisis would go away. Investors remain skeptical that the latest measures — including installation of cross-party governments in Greece and Italy and a “theoretical” shoring up of reserves in Europe’s stabilization fund — will fix the problem.
The heavily-indebted nations will have to demonstrate an ability to grow after they have implemented all their latest stringent austerity measures.
It’s generally conceded there is one relatively simple way to clear up Europe’s debt woes. Extend the role of the European Central Bank (ECB) to become lender of last resort. The ECB is currently buying the bonds of at-risk nations in secondary markets.
If it were to become active in initial offerings, interest rates would be forced down.
Such a plan is not to the liking of the Germans. It’s tantamount to printing money and implies severe inflationary problems if prolonged. This logic verges on being alarmist, since inflation has been moderating along with the slowing world economy.
Plus avoiding another financial meltdown would seem to take precedence.
The ECB as lender of last resort would likely lead to the issuance of Euro-bonds. That would cost Germany money.
Due to the spreading of risk, the rate at which Eurobonds could be sold by Greece, Italy, Portugal and Spain would be considerably lower than what they are paying now for domestic issuances.
But Germany, as the biggest and most solvent backer of a Eurobond, would be dinged more than it is currently being charged for its “bunds.”
Finally, there is a perceived danger that a wider role for the ECB would let profligate nations off the hook. There is less chance of this occurring now than before incumbent governments were replaced.
Indeed, this may be the best hope for Europe. The evidence may become undeniable that certain governments have mended their former spendthrift ways and that more fiscally responsible management has become the norm.
Eventually, there would be justification for Germany to soften its stand against further integration with other Euro-zone partners.
This would pave the way for a more all-encompassing role to be assumed by the ECB and/or measures to facilitate income redistribution between states through a fiscal union.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
