Housing starts increased 3.5% in May to 560,000 units at an annual rate
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Implications:  Housing starts bounced back in May, coming in well above consensus expectations.  Last month we said the drop in starts in April was due to an unusually violent tornado season because, on net, the entire decline happened in the South.  Outside of that one region, starts were up.  In other words, last month's report did not signal a future downward trend.  And, as we anticipated, starts rebounded in May.  We believe home building has finally hit a long-term inflection point and will be riding a substantial upward trend over the next several years, just to get back to a "normal" pace of new residential construction.  Right now, the number of homes under construction is at the lowest levels on record (dating back to 1970). As excess inventories continue to be worked off, home building will need to increase substantially.  In fact, the pace of home building is so low that inventory reductions will continue at a robust pace even as home building begins its long-term recovery.  The chart above shows that the upward trend has already begun for multi-unit homes. In other news this morning, initial claims for unemployment insurance fell 16,000 last week to 414,000.  Continuing claims for regular state benefits declined 21,000 to 3.68 million.  Also, in other news, the Philadelphia Fed index, a measure of manufacturing activity in that region, fell to -7.7 in June from 3.9 in May.  The index has dropped steeply since hitting a 25-year high back in March.  We think this is due to supply-chain disruptions from Japan and that the manufacturing sector will rebound sharply in the months ahead.

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Posted on Thursday, June 16, 2011 @ 10:10 AM

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