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More signs of improvement

The U.S. economy continues to struggle with high unemployment, only moderate jobs growth, and an oppressive level of government spending and regulation, but the outlook is nevertheless improving, as several indicators released today show.

The most surprising news was the stronger-than-expected rise in the NAHB Housing Market Index of homebuilder sentiment. It was also gratifying to me since a year ago I predicted that by the end of last year the housing market would be showing signs of life, and my prediction for this year calls for continued gradual improvement. My sense of the market's sentiment is that most people see housing construction and prices either flat or down this year, so gradual improvement coming off a multi-year and extremely low bottom are quite a surprise. Today's index reading is the best we have seen in four and a half years. Sentiment can play an important role in the housing market, so the increasing signs of a bottom could create a "buy it now before the price goes up" mentality, especially since houses have never been more affordable than they are today.

This chart shows an index of new mortgage application activity. It's been choppy of late, but an uptrend from the lows of summer 2010 is in place I believe, and this is consistent with the rise in the homebuilders sentiment index (top chart) and the increase in construction activity in the past year.

December industrial production increased 0.4%, and production is up at a 4.8% annualized pace over the past six months. The charts above show how manufacturing production continues to improve, rising at a 5.2% annualized pace over the past six months and 4% over the past year. The manufacturing sector has yet to recover its pre-recession high, which is unfortunate, but progress is being made, and that's what is important on the margin.

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