Tuesday, May 17, 2011

Housing Starts Unchanged: Gaining Historical Perspective

The Lehmann Letter (SM)

This morning the Census Bureau included the following in its report on new residential construction


“Privately-owned housing starts in April were at a seasonally adjusted annual rate of 523,000. This is 10.6 percent (±13.0%)* below the revised March estimate of 585 000 and is 23 9 percent (±7 0%) below the revised April 2010 rate of 687 000.”

Housing Starts

(Click on chart to enlarge.)

Recessions shaded

At first glance that seems to contradict this letter's heading, which announces that housing starts are unchanged. But if you look at the chart, you'll see that housing starts have limped along at about 600,000 for the past two years. The Census Bureau's announcement that housing starts fell by 10.6% from March's level and by 23.9% from the year-ago level creates the impression of a recent and sharp downturn. These numbers are misleading because they refer to a low base and because there has been so much fluctuation around that base. Similarly, a one-month increase of 10% would not signal a recovery.

Truth be told: Residential construction is stuck at a dismally low level and has been fluctuating around that level for some time. Month after month of improvement, leading into years of improvement, are required. Housing starts must double (that's right, double) before this leading sector resumes its positive role.

This is a good illustration of historical perspective's importance and the distortion created by short-run focus.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

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