Land vs. machine

Conflicting economic data have been released today.

On one hand, we have U.S. Commerce Department data showing that housing starts in May fell 10% to a 593,000 annual rate.  This figure compares to an expected rate of 648,000.  Clearly this is a big miss relative to expectations.

On the other hand, we have Federal Reserve industrial production data showing an expansion of 1.2% in May.  This compares to April’s expansion of 0.7%.

So which data should you focus on?

Analysis: I feel that overwhelmingly the more important of the two figures, industrial production is the more important.  Why?  Primarily because heading into the recession everyone and their sister-in-law knew that real estate was massively, massively, massively, massively overbuilt.  All of that excess inventory, without eeeeeeasy money (mortgages) to support it was going to take a long time to be worked through.  Despite a an economic depression in real estate for the last two years and big declines in the prices of homes, there still remains a glut of houses.  So understandably housing starts are still not doing that well.

Anyone expecting real estate to lead the way into economic expansion is, quite frankly, smoking something.  So I am largely unconcerned by the housing starts number.

By contrast, industrial production long lagged the rest of the economy and now is one of the leaders.  This is understandable, too.  After all, industry had its depression for a goodly portion of the last two decades.  Now there are manufacturing efficiencies in U.S. factories that were not present before.  So it’s to be expected that industry would be one of the economic sectors leading us out of a recession.  Real estate ought to be the last industry to recover exiting this recession.

Importance grade: 4; neither set of data are particularly important in my opinion.  Most important remains consumer confidence.

Jason