The economy has stopped surprising people on the upside, which is why the stock market has stopped going up. But that hasn’t stopped the “green shoots” crowd from going bananas about every little uptick.
Last week, for example, it was housing starts, which jumped sequentially in May. Yes, you have to stop plummeting before you can start soaring. But the arrival of the former does not automatically mean we’re headed for the latter.
In fact, as fund manager John Hussman makes clear, once you look at the housing number in its proper context, there seems little to celebrate about.
Housing starts are soaring! Up 17% just last month! So trumpeted a perma-bullish financial news anchor last week, hailing the news as the portent of an economic rebound. Guest analysts were quick to talk about turning the corner, and moving through the “bottoming process,” while some even expressed concern that the rebound in housing starts was so strong that it might create inventory pressures by adding to the stock of homes too quickly.
Let’s take a breath. Economic reports – especially growth rates – can be very misleading when they are not placed into context. Below is a chart of U.S. housing starts since 2003 (thousands, monthly data at an annual rate). See that little 78,000 home uptick in the chart in the last data point – the little bit of statistical noise that is smaller than even the typical 119,000 standard deviation of month-to-month fluctuations? There’s your boom in housing starts.
Hussman goes on to illustrate just how far housing starts will have to rebound for us to get back to even ZERO real GDP growth, let alone expansion. Specifically, they’ll have to jump a full 50%.
Unfortunately, the issue is far larger than a simple exaggeration of economic news…. Sustained economic expansions are primarily driven – not by growth in consumer spending (which is very, very smooth over time) – but by growth in gross investment and durables of the large, debt-financed variety: housing, autos, equipment, factories, capital spending, and so forth. A 50% jump in housing starts here, to an annual rate over 800,000 units from the current 532,000, would still only be consistent with zero sustained growth in GDP.