While a sharp drop in U.S. housing starts in July will continue to put a dent in the residential investment component of third-quarter gross domestic product, the strong bounce back of industrial production volume should temper recession fears.
U.S. industrial production beat estimates last month, rising 0.6% in July from June, according to Federal Reserve data released Tuesday. At the same time, U.S. housing starts in July fell 9.6% to their lowest level since February 2021 as the housing market continued to cool off amid steep rises in mortgage rates, the U.S. Census Bureau said in a separate report.
The increase in industrial activities was more impressive as it came off the back of an upward revision to June’s data from a 0.2% decline to a 0.01% increase. Even alongside the decline in housing starts, this industrial data shows that recession fears may have been overblown after the economy contracted for two consecutive quarters in the first half of 2022.
Housing starts and permits
There were only 1.45 million new homes started in July on an annualized basis, lower than the long-term equilibrium of 1.7 million homes needed to meet the target demand.
Despite housing prices remaining elevated, sour builders’ sentiment due to falling demand and rising interest rates has kept housing supply down about 20% since the recent annualized high of 1.8 million in April.
The number of permits—a proxy for future starts—also dropped on the month, down 1.3% to 1.67 million. On the other hand, housing completions remained steady in July, up 1.1%.
With the Fed continuing to step on the pedal in terms of interest rates, we should expect the housing market to decline further. It is too early to speculate on the timing of a potential Fed rate cut as we are still very far away from reaching the target level of inflation.
Industrial production
The upside surprise in industrial production volume in July was driven by the manufacturing sector, which was up 0.7% on the month. Within that sector, automobile production led the increase, up 10.4%. The category makes up 8.6% of the total industrial volume.
Mining slowed down in July, up only 0.7% from 2% previously amid declines in energy prices. Utilities fell 0.8% following a 0.3% decline in the prior month.
Capacity utilization inched up to 80.3%, the highest level since 2018, from 79.9% in the previous month. Utilization percentage has been stable in the last couple of months, suggesting concerns over supply-chain disruptions, at least in the industrial sector, may soon be behind us.
We expect the rolling over of energy prices will help lower input costs for manufacturers, boosting production in the coming months. In our estimation, that should delay an incoming recession further to at least 2023.
