From Michelle Meyer at Merrill Lynch: Will April showers bring May flowers?
We have all been waiting for the weather to unleash stronger economic activity, particularly for the housing market. However, the housing data so far have been less than encouraging. We think it will be challenging to realise average housing starts of 1.1 million this year and are therefore trimming our forecast to 1.03 million. Our trajectory through year end is still up, with starts rising 11% from last year, but the rebound is more muted. Slower growth in starts combined with the weaker pace of home sales suggests residential investment will add 0.2pp to GDP growth this year versus our prior forecast of 0.3pp.
It is important to put the recovery in housing construction into perspective. The turn started in early 2011 and gained momentum at the end of 2012. However, last year growth was weak until the bounce at the very end of the year. The question is whether that bounce was a start of a stronger rebound which just got delayed due to the weather or simply noise in the data. We think the truth is somewhere in between and are therefore penciling in an acceleration in starts, but not at the pace we experienced in Q4 of last year.
We have to remember that while this is not a V-shaped trajectory, it is still a recovery. Housing construction will head higher as household formation gradually recovers, capacity constraints around available lots and labour are resolved and credit conditions slowly ease for homebuyers. But this all takes time, and we must be patient as the market finds its new equilibrium.
Merrill has reduced their forecast for housing starts from 1.100 million this year to 1.033 million (still an 11% increase from 2013). They have kept their forecast for new home sales at 515 thousand (close to a 20% gain).
More from Calculated Risk:
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- Philly Fed Manufacturing Survey indicated Faster Expansion in April
- Weekly Initial Unemployment Claims at 304,000; 4-Week average lowest since 2007