Housing starts picked up in October

INDICATOR: October Housing Starts and Permits KEY DATA: Starts: +13.7 percent; 1-Familly: 5.3 percent; Multi-Family: 36.8 percent; Permits: +5.9 percent; 1-Family: +1.9 percent; Multi-Family: +13.9 percent

IN A NUTSHELL: “With home construction back on track, one of the softer segments of the economy is picking up steam.”

WHAT IT MEANS: Home construction had been in a funk for a number of months, but that seems to be changing. Indeed, residential investment, as it is called in the GDP report, restrained growth in the second and third quarters. However, builders have suddenly found reasons to put shovels in the ground. Housing starts soared to the second highest pace in over a decade in October.

Much of the increase came from the ever-volatile multifamily segment, which surged by 37 percent. While the single-family component didn’t rise nearly as much, the gain was still quite good. Geographically, there were some discrepancies and oddities. In the Midwest and South, all segments were up solid. But in the Northeast, single-family starts tanked but multi-family construction more than tripled. And in the Midwest, total activity decline as single-family starts fell sharply.

Looking outward, the rise in permit requests indicate that home construction should remain firm, though it is doubtful that future gains will look anything close to what we saw in October. Even with the surge in construction, the number of permits requested by not yet used still rose. Indeed, permit requests were slightly higher in October than starts. It is likely that housing will add to growth in the fourth quarter.

MARKETS AND FED POLICY IMPLICATIONS: I keep hearing from our learned members of Congress that we desperately need a tax cut because growth is terrible and we people are desperate for jobs. Either I am living in a parallel universe or they are just blowing smoke, but that is just not the case.

This isn’t 2009. The economy is moving ahead solidly and as I constantly point out, the issue isn’t available jobs it’s qualified workers. But, of course, in Washington, letting facts get in the way of a good political speech would be tantamount to treason, so we will have to keep listening to the babble. Interestingly, since the tax cuts go largely to upper income households, who will not spend nearly as much of the after-tax income gains as lower and middle-income families,

that could wind up being a benefit.

The increase in consumer demand will be muted. And from reports coming out of meetings that administration officials have had with business leaders, not a whole lot of the tax cuts cuts will go to new investment. Paying down debt seems to be the usage of

choice. I suspect that a lot of the increased profits will, as usual, be used to raise dividends, buy back stock and expand merger and acquisition efforts.

So maybe my concerns about the economy picking up too much steam given the lack of workers is overblown. But think about this: The deficit will rise even more than expected if the retained taxes don’t go to new economic activity while at the same time, the

Fed is shrinking its balance sheet. That seems to argue for rising supply, falling prices and increasing interest rates. That cannot be great for the economy or equities. Just a thought.