Implications:  Home building ended 2018 on a disappointing note, falling more than expected to the slowest pace of activity in two years.  Moreover, the slump in December was broad-based, with nearly every major region showing a decline and both single-family and multi-unit starts falling.  However, we believe investors should take this report with a grain of salt.  This is the third report from the Census Bureau for the month of December – along with retail sales and durable goods orders – that was delayed by the government shutdown and has come in below consensus expectations.  These reports are inconsistent with other figures on the job market as well as reports from purchasing managers and sales figures from Amazon and Walmart.  Further, the headline starts number is inconsistent with the moderate weather and falling mortgage rates we saw in December.  Although housing starts are down 10.9% from a year ago this is largely due to the effects of the unusually strong hurricane season in 2017.  The fourth quarter of 2017 saw a storm-induced jump in new construction in the aftermath of Hurricanes Harvey and Irma.  With that in mind, year-ago comparisons involving a single month look like a poor measure of housing health.  Looking instead at the annual average for 2018 versus 2017 shows single-family starts up 1.9% while overall starts are up 3.0%.  In contrast to starts, the forward-looking data in today's report show that permits for new construction eked out a gain 0.3% in December.  Using our annual measure, permits were up 2.2% in 2018 compared to 2017.  Notably, about 187,000 homes were authorized but not yet started in December, the largest amount since 2007. At the same time, the pace of housing completions has begun to fall while the number of units under construction remains at a post-recession high.  This points toward builders staying busy in 2019, if they can find the workers. The increasingly tight labor market has made hiring difficult across industries, and construction is no exception, with job openings in that sector at a record high and rising rapidly.  Despite recent softness, our outlook on housing hasn't changed.  We still anticipate a rising trend in home building in the next few years.  Based on fundamentals – population growth and scrappage – the US needs about 1.5 million new housing units per year but hasn't built at that pace since 2006.  In other housing news today, the national Case-Shiller index was up 0.3% in December and is up 4.7% from a year ago, a meaningful deceleration from the 6.3% increase in the year ending in December 2017.  Similarly, the FHFA index, which measures prices for homes with a conforming mortgage, rose 0.3% in December and is up 5.6% from a year ago, a smaller gain than the 6.9% increase in the year ending in December 2017.  Finally, On the manufacturing front, the Richmond Fed index, which measures mid-Atlantic factory sentiment, came in at 16 in February after a brief dip into negative territory at -2 in January.  This signals a rebound in optimism from the factory sector.

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