Housing Starts Sag to 5-Year Low, Manufacturing Slows, Stirring Talk of Recession
Housing starts in January fell to their lowest level in more than five years, while the industrial sector of the economy expanded at a sluggish pace, the Commerce Department reported Wednesday.
Economists had expected slower growth in industrial production in the early part of this year as factories reduce excess inventories, but the low level of housing starts was more severe than most had anticipated.
Most economists still are predicting, however, that the economy will “muddle” through this election year without a recession.
Housing starts fell 1.9% last month to an annual rate of 1.38 million units, the lowest level since December, 1982, just after the end of the last recession, the Commerce Department said.
Most analysts had expected a modest rebound to a rate of about 1.45 million units a year, following the steep 15.5% drop in December.
Economy Slower in ’88
U.S. industrial production edged up 0.2% in January, despite big declines in auto production and steel, the Federal Reserve Board said.
The Fed said that the January increase was just half the 0.4% gain recorded in both November and December.
Private analysts said this slower growth was consistent with their view that the economy will slow considerably in the early part of 1988 as businesses work off a backlog of unsold inventories built up during the final three months of 1987.
Strength in domestic production helped push the overall economy, as measured by the gross national product, to a robust annual growth rate of 4.2% from October through December. However, nearly three-fourths of that strength went into inventories rather than final sales.
Analysts said this backlog will have to be worked off in coming months and will translate into an extremely sluggish economy in the first three months of this year.
One reason for the smaller growth was a drop in automobile production to an annual rate of 6.0 million units per year from 6.5 million in December, which came as no surprise to economists who had been following the recent buildup of unsold new cars.
“I don’t think anyone expected industrial production to be real strong in January because of auto output,” said Kathryn Kobe, vice president of the Washington-based Joel Popkin & Co. economic forecasting firm.
“Basically, this shows that indeed auto manufacturers were working off inventories in January,” added Stacy Kottman, an economic analyst at Georgia State University.
Total manufacturing output, other than from mines and utilities, rose 0.2% last month after a 0.5% rise in December, while business equipment production declined slightly, the Fed said.
“It does appear that manufacturing is pulling in the horns a little bit--trying to correct an inventory problem before it develops,” Kottman said. “This is not unusual. As a matter of fact it’s healthy.”
Output of consumer goods rose 0.4% last month after gaining 0.1% in December and November, but much of the latest increase came in the relatively unstable areas of food and energy production, the Fed said.
“Right now, what we’re seeing is an economy that’s growing more slowly than it did in 1987,” said Lawrence Chimerine, president of WEFA Group, a Bala-Cynwyd, Pa., forecasting firm.
“I think what we’re going to see on balance is pretty much what we’ve seen for the last month of two,” said Chimerine, who estimates the chances of a recession this year at 40%.
But if housing starts remain at their low levels, it will weaken the construction industry, which could drag the rest of the economy along with it, Chimerine said.
“If we don’t get a pickup, at least a modest pickup in the next couple of months, I think it will increase the chances of a recession,” he added.
Other Signs Hopeful
Most building experts dismissed December’s decline, the steepest monthly fall in three years, as an aberration brought on by bad weather. But Wednesday’s report made that appear less likely.
Building permits, considered a good sign of future activity, fell 8.2% in January to an annual rate of 1.25 million units, the lowest level for permits since January, 1985. Permits had fallen 7.4% in December.
Before seasonal adjustment, housing starts in January fell to 78,500 units from 85,700 in December.
In January, construction starts fell 17.1% in the South to an annual rate of 469,000 units. Starts were down an even larger 21.8% in the Midwest to an annual rate of 223,000 units.
Two other regions showed strength, however. Starts rose 27.6% in the Northeast to an annual rate of 291,000 units and were up 21.2% in the West to a rate of 394,000 units.
The pace of home construction is vital to the health of the overall economy because it determines sales of domestic appliances, furniture and many other items.
The weakest housing area was in multifamily homes, which slumped 31.8% in December and rebounded by just 0.8% in January to a seasonally adjusted 366,000 units.
National Assn. of Homebuilders Chief Economist David Seiders said vacancy rates in rental units, which are now at their highest point in more than 20 years, and the elimination of tax incentives are depressing multifamily home building.
January housing starts rose significantly in the Northeast and the West but fell sharply in the Midwest and South.
