April means springtime, and with apologies to the poet Lord Tennyson, my fancy has turned to thoughts of baseball, Wall Street earnings reports and macroeconomic data from the first quarter.
It's time to take a closer look at one of the most important indicators for the U.S. manufacturing sector and especially the plastics industry: U.S. housing starts.
At the end of 2017, my forecast called for a gain of 4 percent in the total number of new housing units started in 2018. And as I reported at that time, a gain of 4 percent would push the annual total up from just over 1.2 million units in 2017 to 1.25 million this year.
The data from the first quarter indicates that I need to raise my forecast a bit.
According to the latest report from the U.S. Census Bureau, the number of new houses started in March increased by 10 percent when compared with the same month last year. For the first quarter, the total was up by 8 percent.
Clearly, the trend this year is strong out of the gate. Therefore, I have raised the forecast for 2018 to a gain of 6 percent. This would put the annual total right at 1.275 million units. Due to obvious seasonal factors, the first quarter is always the weakest in terms of the number of houses started in the United States, and the residential construction sector will need to sustain solid momentum through the next two quarters to hit my new number.
This forecast is based on my expectations for a gradual acceleration in the pace of household formations as well as continued improvement in both the U.S. employment data and the household income figures. These positive factors will be partially mitigated by rising interest rates, rising house prices, and the loss of the tax deduction for interest paid on mortgages.
So, the overall picture for the residential construction sector and the manufacturers that supply plastics building materials remains bright. But as is always the case, a keener insight into this market segment can be gleaned from a deeper dive into the data.
One of the surprises in the first-quarter data is the pop in the multifamily figures. Through the first three months of 2018, the number of multifamily units started is up 10 percent over last year. This is a stark contrast to the trend of the past couple of years.
The chart shows that the rate of growth in the multifamily figures was robust for the first six years after the recession, but the annual totals were negative in both 2016 and 2017. Keep in mind that the chart shows the growth rate for the data, not the actual figures. The pace of growth decelerated steadily after 2011, but it remained well above the zero line until 2016. By comparison, the rate of growth in the single-family data has remained relatively steady and strong for the past four years.
There are a couple of reasons why the activity levels in the multifamily sector merit further scrutiny. Multifamily units are investment properties, so the trends in this data reflect investor sentiment about things such as interest rates and rates of return in other asset classes and the tax code. But the most important factor is market demand for rental units.
The American dream of owning your own home is not dead, but there has been a shift in the market in recent years toward renting. A significant percentage of entrants into the housing market are not interested in purchasing their homes outright, at least not yet. Some of this may have to do with factors such as too much student debt or low credit worthiness, but much of it is just a desire for a different experience from life. This will have a significant impact on all their spending patterns, so I am watching the trend in the multifamily data with increasing interest.
The trend in the single-family starts data has long been considered a good leading indicator of consumer spending trends in the U.S. The recent increase in the preference for rentals notwithstanding, Americans still spend a lot of money on their homes — and not just on the purchase of the house. When you add in expenditures for furnishings, decor, maintenance and outdoor entertainment products, you get a good idea of the financial resources allocated for our domiciles.
The fact that the rate of growth in the single-family data has been consistent and strong over the past few years indicates that the current economic expansion still has legs. This data will likely decelerate rapidly and then drop into negative territory a few months before the overall economy goes into recession. There is yet no reason to believe it will happen anytime soon.
There is one other trend in the starts data this year that is worth your attention. Virtually all the growth in the national total so far this year is due to the gain in the West region. The changes in the other three regions are small and well within their respective margins for error. But the increase in the total from the West region through the first three months is large and has plenty of statistical significance.
I would move out there myself if I thought they would find enough water in the next 20 years to supply all these new apartments they are building.