SINGLE-FAMILY HOME CONSTRUCTION FELL IN 1995

MANUFACTURING SECTOR SLOWED IN MARCH

The Commerce Department's Bureau of the Census reported today that new construction put in place during February was estimated at a seasonally adjusted annual rate of $534.9 billion, 0.9 (+/-5) percent below the revised January estimate. You probably noticed right off that this is another of those government statistics for which the percentage uncertainty for the monthly change is significantly larger than the change itself.

In the past, for other indicators, we have had to look at changes over longer periods of time (usually a year) to reduce the uncertainty. We will do that here for the construction data. We'll take a look at single-family housing construction because it gives an indication of how home builders are responding to real and perceived demand from the consumer sector.

Today's report states that the Relative Standard Error (RSE) for the annual estimate of single-unit housing construction is 2 percent. An RSE of 2 percent means that it is 90 percent certain that the number of interest falls within (+/-2) percent of the stated value. The report states that the value of 1995 new single-family construction, adjusted for inflation, was $126.9 billion. For 1994, it was $140.3 billion. So, from 1994 to 1995, the total value of single-family home construction declined by about 9.6 percent. Since the totals for the two years each have an RSE of 2 percent, we can say that, from 1994 to 1995, the total inflation-adjusted value of new single-family homes declined at least 5.6 percent and maybe as much as 13.6 percent. That's still not very precise; but, it's the best that can be done with the data available. And, it sure beats the heck out of a figure like 0.9 (+/-5) percent.

Now let's talk about one of my favorite monthly reports: The National Association of Purchasing Management's report on the results of its monthly nationwide member survey. Each month the NAPM surveys a representative sampling of its members on the status of a variety of indicators related to business conditions at their firms. The NAPM survey results are important because they are released ahead of all the government reports and because they provide an overview of the national economy from the point of view of the private sector -- completely independent of the government.

Today, in the report on its March survey, the NAPM revealed that its widely-followed Purchasing Managers Index (PMI) had risen to 46.9%, from a February value of 45.2%. The PMI is a composite of five different indicators measured by the survey (New Orders, Production, Supplier Deliveries, Inventories, and Employment). In theory, the PMI can vary anywhere between 0% and 100%. But, in practice, the Index has moved in a range between a high of 78% in 1950 and a low 30% in 1980. During the past 5 years it hit a low of 38% in 1991 and a high near 60% in October, 1994. Any reading less than 50% is indicative of weakness in the manufacturing sector. A NAPM study showed a close correlation between the annual average value of the PMI and the annual value for the Gross Domestic Product. An average annual PMI level of 44.5% corresponds to zero GDP growth.

Thus, the March PMI reading of 46.9% indicates weakness in the manufacturing sector. This month's reading marks the 8th consecutive reading below 50%. Over the longer term, the PMI has been in a pronounced downtrend ever since the October, 1994 high.

In March, the Indexes of Production, New Orders, Order Backlogs, Inventories, Prices Paid, and Employment all showed decreased activity. March marked the sixth straight month of negative growth in new orders and the fourteenth straight month of shrinking manufacturing payrolls. The Price Index, after declining 13 straight months, edged up 1.2 points to a still-anemic 39.5%, and the Inventories Index dropped by 5 points to 38.8%. The last time this index was this low was in December 1991, when the economy was working its way out of a recession.

So, perhaps we shouldn't jump too quickly to the conclusion that this economy is on the fast track to instant prosperity. The NAPM report for March is telling a different story.

Byline: Lafferty (MF Merlin)