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The Good…
Housing starts rose 1.7 percent in September to a 1.574 million-unit rate after declining 6.7 percent in August. Even with lower
mortgage rates, many economists had anticipated a downward trend in housing based on the overall weaker pace of economic
activity. Moreover, the September figures were expected to look somewhat worse for wear given the mid-month terrorist attacks.
Nevertheless, housing starts shot up in the South and West regions of the United States, offsetting declines in the Midwest and
Northeast.
In the past, Federal Reserve easing has spurred economic activity through interest sensitive sectors such as housing. That means
that the housing market should help spur related spending on furniture and appliances boosting retail sales. It also means that the
U.S. really needs to see a healthy housing market to keep it out of the dumps. If the housing market declines in this period of falling
interest rates, it would probably ensure a deeper recession.
More Good...
The consumer price index jumped 0.4 percent in September after gaining only 0.1 percent in August. No, the headline news doesn't
appear so good. But a surge in gasoline prices - which we know have already declined in October - boosted the overall total. In
addition, a spurt in tobacco prices, another volatile component, also pushed up the index. Excluding food and energy prices, the CPI
rose 0.2 percent, in line with the gains of the past several months. At 2.6 percent, the yearly change in the core CPI is not too different
from the past few months and is down slightly from the peak. At the same time, the total CPI is up 2.6 percent, definitely down from its
peak.
We like to look at trends in prices of services and commodities separately because they do a good job of showing those items that
fluctuate more dramatically (goods) and those that take a long time to turn around (services). The service component of the CPI was
definitely on the rise from mid-1999 through early 2001. Notice that the yearly changes are now moderating. This means that the
inflationary spiral is not worsening. Prices of goods are affected mainly by energy, as can be seen by the sharp fluctuations over the
past few years. The moderation in service inflation is encouraging.
The Bad...
The international trade deficit on goods and services narrowed in August to $27.1 billion from July's shortfall of $29.2 billion. On the
surface, this is good news because it means that the trade deficit is smaller in the third quarter than it was in the second quarter. This
will add to GDP growth - offsetting some of the weakness coming from domestic production. In August, exports rose 1 percent after
declining sharply in the two previous months. At the same time, imports continued their steep decline. The drop in imports over the
past year reflects the decline in demand for capital and consumer goods.
Remember that the October release reflects data for August. There is no question that we will see disruptions in shipments - both
exports and imports. This means that the September and October figures (released in November and December) will be more
difficult to interpret - and should be viewed cautiously.
The Ugly
The manufacturing sector continues to reveal the worst part of this economy. The index of industrial production fell 1 percent in
September - its twelfth straight decline. All major product groups posted declines in September, but the largest drop (2.3 percent)
came from business equipment. Production of business equipment is now down 9.5 percent from year ago levels. There is no
question that the manufacturing sector is in recession given the four straight quarterly declines.
The outlook for October is not very good. The business outlook survey done by the Philadelphia Fed correlates well with monthly
changes in production. The October figures showed more severe contraction in the manufacturing sector as the survey declined to
-27.4 from a level of -7.3 in September. According to the report, this very much reflects the September 11 attacks.
Markets at a Glance • Recap of US Markets • The Economy • The Bottom Line • Looking Ahead
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