Nov. 18, 2021

How "Housing Starts" Show A Bigger Problem.

Yesterday we had the latest report on Housing Starts.

That time is when construction actually begins. Foundations are laid and new homes start to come together.

Exciting times. And for economists the unmistakable signs of a positive uptick in housing.

Yesterday, housing starts took another hit. It was the third month in a row, for "Housing Starts" to come in lower. And when you step back and look at it, starts are now running fully 12% below the level reached just 7 months ago, in March.

So what accounts for this growing, and very negative trend. You see real estate, has been one of the very few, very reliable positives in this very shaky economy.

Now, Wall Street was quick to attribute the current decline to the rising cost of construction. And without a doubt that is a very real negative.

But I have a couple of friends who are real estate developers, and they're a hearty lot. Not easily dissuaded from starting that next, new project.

Yes, the cost is a factor. But there has to be more to this story.

And it was pretty easy to put it together. The number 1 players in this economy, and the principal real estate buyers are what economists label as the consumer. And you can clearly see that there is a three-month trend of real negatives for consumers.

Starting in the late summer, around August or so, things started to really turn down for the average American. By that time the stimulus checks were behind us. The lockdown was over. And life was beginning to return to a semblance, at least, of normal.

Now the first thing to hit our Average American, our consumer this year was inflation. It really began back in April, where for the first time inflation was well above the Fed's inflation target of 2%. that month it came in better than 4%. But don't worry inflation is only temporary we all thought.

Hardly, it turns out that inflation is here to stay, rising every month since then. And literally driving the price of food and gas through the roof. This directly affects all of us, by forcing us to pay up for these vital goods and thereby reducing our disposable income. Which incidentally is down 17 1/2% from its peak last March.

And there's nothing that makes you feel more broke than having an empty checkbook at the end of the month.

There is another, more pernicious aspect, to this skyrocketing inflation. One that economists have a tendency to overlook. Inflation, like we're seeing now, forces you to spend more. It's not an option to buy gas for those who commute to work. And it's not an option to buy the food you eat. Consumers spend more when inflation runs out of control. They have to, it's not a choice.

Combine that, with the drive to make everyday purchases now, before prices go even higher. Another pernicious aspect of high inflation. And you'll see a rise in consumer spending just like we're seeing right now.

But it's not a healthy rise like we normally expect from consumer spending. It's a rise driven by necessity. And driven by the expectation of higher, inflation-driven prices.

So, for the average American, the consumers in our economy two major events are happening simultaneously. Their income is declining, both real and nominal last month at least. Stimulus checks are over. And their real income is declining in the face of high, and possibly rising inflation.

But perhaps even more importantly, the average American's view of our economy is changing. Gone is the image of a stable-priced environment where food and energy especially don't change much.

In its place is an economy that suffers from higher and higher prices each and every month. And what's worse the powers that be, in Washington seem helpless to do anything about this situation.

All this is reflected in the twin surveys that the University of Michigan took recently. The consumer's view of current conditions and of their expectations for the future. Both surveys are down 25% from their highs just 5 or 6 months ago.

We don't like where we are. And we don't like where we're going.

And this it seems to me is the driving force now in the US Economy.

The consumer, the largest player in the economy, represents 2/3rds of all business activity, the consumer is not a happy camper.

They're in a place they don't like, and they fear that things may get even worse.

Now against that background:

Do you want to buy a house?