The good news is the U.S. Census Bureau is steadily recovering from the effects of the shutdown. The bad news is its latest data shows the number of houses started in the United States in December fell to 71,700 units.
This was a 12 percent drop when compared with the same month in 2017. When combined with the revised figures from October and November, the fourth-quarter total for 2018 was down a disappointing 6.7 percent.
This fourth-quarter performance put a sour ending on an otherwise solid year. Through the first three quarters of 2018, the trend in the monthly data for U.S. housing starts was unequivocally upward. As of last September, the year-to-date starts total was up 7 percent when compared with 2017.
If you add the weak fourth quarter to the total from previous three strong quarters, the annual tally for housing starts in 2018 was just below 1.25 million units. This was a moderate gain of 3.6 percent over 2017, and it marked the ninth consecutive annual increase in the data.
My latest forecast calls for a small increase in the range of 0-2 percent in total housing starts in 2019. This will put the annual total at 1.27 million units. It may be a close call, but the string of annual gains should get to at least 10 years. Admittedly, my margin for error is a small one, therefore the risk in this forecast is a bit higher.
It's no secret that the trend in housing starts is one of the most closely watched macroeconomic indicators there is — and not just for the segment of the plastics industry that manufactures building materials. Since the end of World War II, the trend in this data has been a crucial leading indicator of Americans' overall spending and confidence levels.
In other words, if it's a good time to build a new house, then it is also a good time to buy, renovate or refurbish an existing home. It is also a good time to buy a new car or other big-ticket items. Expanding construction activity indicates that workers who have jobs and households are optimistic about their prospects for the future. Throughout the past century, one of the defining characteristics of the U.S. economy is that when Americans feel prosperous, they build houses. And on the flip side, when new residential construction activity starts to wane, it often signals a recession in the overall economy.
So it is no surprise that three consecutive monthly declines have the attention of analysts and policymakers. The question increasingly being asked is, is this recent downturn in housing starts the start of an extended downtrend that may even portend the next recession in the overall economy? After all, this recovery is already the longest one any of us has ever experienced.
And given the political tone in the country, the apprehensions stemming from the trade issues with China, the slowdown in global economic growth, and the uncertainty surrounding the Mueller report and sundry other legal issues of our president, this question has a greater sense of importance.
Nevertheless, I believe the probability of a sustained downturn at this time is unlikely. There is just too much momentum in the economic fundamentals. The labor market is too strong and the wage and income data are even starting to accelerate upward. Overall economic growth will decelerate this year, but it will stay firmly positive. The recent decline in housing starts should turn out to be a market correction caused by one-time events. We will likely now experience a period of consolidation followed by a reversion to the moderate uptrend in the data.