Our Take as June Housing Starts and Industrial Production Top Expectations
Digging into the reports, we find support for several portfolio holdings and the economy.
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* Single-family housing data in the June Housing Starts report support our positions in Builders FirstSource and our other construction-related holdings.
* Manufacturing activity accelerated in June, indirectly bolstering consumer spending prospects.
* These two reports should lead to yet another positive revision in the Atlanta Fed GDPNow model.
* We are revisiting our One rating for United Rentals given the recent share price pop.
June Housing Starts and Industrial Production
Today’s June economic data releases for Housing Starts and Industrial Production bested market expectations, showing the economy remains on firm footing. These latest reports suggest we will see another positive revision to the rolling Q2 2024 GDP forecast published by the Atlanta Fed. Following the June Retail Sales report published yesterday, one that was positive for our shares of Costco COST, Amazon AMZN, Mastercard MA, and PepsiCo PEP, that GDPNow model was upped to 2.5% for the June quarter.
While Fed Chair Powell reiterated the Fed isn’t going to wait for inflation to get to 2% to start cutting rates, should the economy fare better than expected, one potential risk is the pace of further inflation progress may be slower than expected. We’re already seeing year-over-year core PPI move in the wrong direction for the last few months, and we continue to think the market is getting ahead of itself with three Fed rate cuts for this year. We will tread carefully as the pace of the current earnings season heats up.
June Housing Starts
Total housing starts in June increased 3.0% month-over-month to a seasonally adjusted annual rate (SAAR) of 1.353 million, topping the market consensus. Single-family housing starts slipped 2.2% on a SAAR basis but were more than 5% higher compared to year-ago levels. Looking at the not-seasonally adjusted data, which removes the Census Bureau's fuzzy math, single-family housing starts ticked higher compared to May and were up nicely year over year.
What stands out to us in that not seasonally adjusted data is the double-digit increase in the June-quarter single-family housing starts compared to the March quarter. Digging even deeper into the report of the New Privately-Owned Housing Units Under Construction at the end of June, not seasonally adjusted single-family units continued to rise, hitting their highest level since November.
These data points support the pick-up in housing construction that bodes well for our shares of Builders FirstSource BLDR as well as United Rentals URI, Vulcan Materials VMC, and Waste Management WM. The recent surge in URI shares, which has them up 17% in the last few days, has us revisiting our current One rating given our current $750 price target.
Despite the quick 21% jump in BLDR shares over almost the same time frame, we continue to see ample upside to our $205 target. That said, if support for BLDR shares at the 200-day moving average ($160.93) fails, the next layer of support comes at the 50-day moving average ($153.34). Later today, we’ll provide an updated technical look for BLDR.
June Industrial Production
When we received the different views on the manufacturing economy in June, presented in the PMI reports from ISM and S&P Global, we said we would be looking for signs as to which one was more correct — ISM’s contraction findings or S&P Global’s growthier ones. Today’s June Industrial Production report was not only stronger than market expectations, rising 0.6% month over month vs. the 0.3% consensus, year-over-year manufacturing production figures for the month accelerated compared to those for May.
We are also seeing the level of capacity utilization, how much of available capacity is being used, continue to climb off May’s recent lows. While it’s not a level that would suggest a new wave of capital spending, rising production levels generally mean more people are working. Paired with real wage growth, more people working generally bodes well for consumer spending, but we acknowledge recent data that show consumers continuing to be selective. We’ll continue to stick with COST and AMZN shares.
At the time of publication, TheStreet Pro Portfolio was long COST, AMZN, MA, PEP, BLDR, URI, VMC and WM.
