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Thursday's Housing Starts Data and the Economic Outlook

Prof. Peter Morici - 4/20/2009

Thursday, the Commerce Department released key data for new home construction—housing starts and permits issued for March. After rising in February to 583,000, housing starts are expected to slip back to 550,000, and those February levels were hardly anything to cheer about. Building permits are expected to remain at recessionary levels.

Even with the $8,000 tax credit for new home buyers, the pace of customer visits remains slow, and the glut of unsold homes exceeds a 12 month supply. A figure less than half that would be considered healthy.

This week’s economic data casts fresh doubts on the Administration’s claims that the economy is near bottom and Larry Summers’ conclusion that the pace of contraction is slowing. Retail sales and industrial production tanked in March. Those are two hard indicators of economic activity, as opposed to soft sentiment indexes and Wall Street musings. Those indicate the economy continued to contract sharply in March.

GDP will continue to fall and unemployment rise into the third quarter.

Our crack team of economic prognosticators and tarot card readers are likely no better than the pack but no worse either. We are forecasting the economy will bottom in the third quarter and accomplish a tepid recovery beginning in the fourth.

The expansion that follows will recoup about half the six million jobs—that will hardly be cause for elation. In fact, it may look more like the luncheon that follows a wake.

President Obama, advised by Goldman Sachs orbiters Lawrence Summers and Timothy Geithner, sees sunshine in rising banking profits but overall the real economy remains sick, because the Administration’s policies fail to address the dysfunctions in the money center banks, which require the Federal Reserve do their job of lending, the artificial shortage of domestic energy, and devastating effects of subsidized imports on manufacturing.

Until the Administration breaks free of Wall Street think—“banks are fundamentally sound and just in need of some extra Fed cash, and the trade deficit and foreign borrowing pose no fundamental threat”—voters that elected Obama to accomplish both change and prosperity will remain disappointed.