The last week of May brought some ill economic tidings as we start the last month of the second quarter. First quarter GDP growth was revised down from an already anemic annual rate of 0.2% to show a contraction of 0.7% in the opening stanza of 2015. Chicago PMI also came in way below expectation and shows the manufacturing sector under strain. Even Canada had a recent bout of weakness. Our neighbor to the north posted a negative GDP of 0.6% in the first quarter. This was the first negative quarterly reading in four years and the worst economic performance since the financial crisis in 2009.
The domestic economy should rebound in the second quarter. However, it will not be the four to five percent boomlet we saw in the second and third quarters of last year after a horrid winter. Based on current consensus forecasts the second quarter should produce growth of approximately two percent in the quarter that closes at the end of this month. If correct, this would be the slowest consecutive two quarters of growth since 2011, and will put pressure on the bull market of the last six years.
One of the best looking areas of the economy right now for outsized gains this year is the housing market. April housing starts came in at a seasonally adjusted annualized rate of 1.14 million. This was up 20% above the levels of March. It was also the strongest pace since the housing collapse began to pick up pace in 2006. Monthly new home sales have averaged 515,000 over the first four months of the year. This is a big improvement from the monthly averages of 440,000 in 2014 and 430,000 in 2013 over the same time period. This trend has been strengthening as of late, and that could very well make housing stocks some of the best performers in 2015.
Even though housing starts are at their highest level in some eight years, they are far below “normalized†levels of the 1.5 million annual housing starts the country has averaged over the past three decades. Housing starts would have to rise more than 30% from April’s level just to reach the average housing activity the country has experienced over the last 30 years. This means the housing recovery could be in the very early innings of a sustained move to higher activity levels. Encouragingly this faster pace of builds has not led to a rise in lumber prices as of yet.
