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The Dallas Morning News Danielle DiMartino Column: Housing Data May Hold Key for Dow

Posted on: Tuesday, 16 May 2006, 12:02 CDT

By Danielle DiMartino, The Dallas Morning News

May 16--With the Dow Jones industrials close to their all-time high, you might wonder what it will take to push the average across that line in the sky.

As far as economic data are concerned, the influential set may seem easily identifiable. Job growth and inflation are the indicators we associate the most with the Federal Reserve and its decision-making process.

So it might surprise you to learn that job growth ranks only second among market movers, and inflation lurks at the bottom of the list.

In fact, according to Merrill Lynch, of all the data due out this week, today's report on April housing starts has the greatest potential to move the Dow. Merrill's economists studied the daily movements in the Dow when various economic reports were released.

With housing starts, "the absolute average change in the Dow is among the highest of the observed indicators," economist Tom Porcelli wrote.

Is the market trying to tell us something?

Housing starts have averaged about 2 million over the last two years and proven to be one of the steadiest indicators in a universe of highly volatile data.

Maybe the Dow is reflecting that starts are some of the most concrete and forward-looking numbers out there. Builders should be acutely sensitive to the economy; they're on the very front line.

'Increasing importance'

The first of two revisions to first-quarter growth, due next Thursday, could well show the economy grew at a supersonic 6 percent between January and March. This tells investors almost nothing of value.

On the other hand, the number of homes being placed into builders' pipelines tells investors a whole heck of a lot about the economy's prospects.

"With several Fed officials recently citing housing as a key risk to their outlook, this report will take on increasing importance," Mr. Porcelli said.

For a preview of today's report, consider Monday's data out of the National Association of Home Builders. The overall index of builder confidence slumped into negative territory for the first time since 1995, with prospective buyer traffic sliding the most.

What about inflation?

You may be wondering about this week's other data on inflation and the manufacturing sector.

The reality is the market hardly notices today's producer price index, as it has grown increasingly less correlated with the consumer price index. As for Wednesday's CPI report, it certainly has the potential to move the bond market, but it holds less sway with stocks.

Today's other "big" report is on industrial production. It has the least chance of jolting the market, which is probably a reflection of manufacturing's diminishing role in our economy as well as globalization's increased influence on the sector.

The bottom line: It behooves savvy investors to think outside the box -- and inside the house.

E-mail ddimartino@dallasnews.com

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Source: The Dallas Morning News

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