Industrial production and housing rebound in July, affirming GDP growth outlook

REAL ECONOMY BLOG | August 16, 2023

Authored by RSM US LLP

Industrial production, housing starts and permits in July have set the tone for a robust third quarter, as GDP growth is expected to be stronger than the long-run level of 1.8%.

Industrial production rose 1% on the month, while housing starts and permits rose 3.9% and 0.1%, respectively, according to data released by various government agencies Wednesday.

The significant 5.2% uptick in vehicle production led the increase in total industrial production level in July. A warmer-than-normal July also drove demand for utilities, as electricity rose 6.7% from a month ago.

The increase in industrial production was broad-based except for natural gas, which saw a drop of 2% on the month.

That said, the strong increase in industrial production in July came after a downward revision to June’s print from a decline of 0.5% to 0.8%. Thus, the index remained below April’s high.

The housing market continued to show a significant shift of demand from existing homes to newly built ones due to elevated mortgage rates. As a result, builders have ramped up construction of new homes, keeping July’s number above forecasts.

There were 1.45 million housing starts in July, a sizable increase compared to the 1.34 million at the start of the year. Still, housing supply remained under our long-run equilibrium of 1.7 million new homes for the next five years.

Most of the increase came from single-family homes, which were up 9.5%, while multifamily homes dropped 0.8%.

While it is likely that the housing market bottom is behind us, we expect a bumpy road ahead for the sector as interest rates will stay unchanged until at least the first quarter of 2024.

The takeaway

Wednesday’s data reaffirmed our call for strong third-quarter economic growth, not only fueled by low inflation but also robust spending and output performances.

However, it remains to be seen if such economic strength can continue past Labor Day, when a host of headwinds, such as tighter credit standards, lower savings levels and the lag impact of elevated interest rates, begin to show full impacts.