Housing starts dip in June, but still strong
Housing starts fell 3.6 percent in June to a 1.67 million unit rate from May's lofty level of 1.735 million units. Both single and multi family construction decreased modestly in June, but overall activity remained quite healthy. The chart below depicts quarterly housing figures along with the mortgage rate. Starts declined in the second quarter from the first quarter pace, which was likely boosted by unseasonably warm weather across the country. The first half of 2002 posted the strongest quarter-to-quarter housing pace since fourth-quarter 1998 and first-quarter 1999. Even with the mild June drop, this housing market continues to astound analysts.

Some economists and market players have worried that the housing market boom (increases in both sales and prices) is creating a market bubble that will need to pop, just like the stock market bubble of the late 1990s. Greenspan noted in his congressional testimony this week that housing market demand is strongly underpinned by a more rapid pace of household formation, which in part stems from the establishment of new immigrants. In addition, there is no question that lower mortgage rates help spur demand by lowering the costs of monthly payments.

There is no question that the strength in the housing market will trickle through to retail spending on furniture, appliances and home furnishings. Last week's retail sales figures showed reasonable gains in such categories.

Industrial production accelerates
The index of industrial production increased 0.8 percent in June after posting an upwardly revised gain of 0.4 percent in May. This pushed total production for the quarter to a 4.5 percent rate from a 2.7 percent rate in the first quarter. Granted, industrial production fell sharply for five quarters, and thus has a long way to go before it recuperates its losses. But it is on the right track. The capacity utilization rate is also picking up, although there is no doubt that the nation's operating rate is well below full throttle and well below levels where inflationary pressures would develop.

Production is not growing equally across various categories or sectors. For instance, production of materials is posting healthy monthly gains running between 0.5 and 1.0 percent over the past several months. At the same time, products are only growing 0.1 to 0.3 percent per month over this same period. Motor vehicle sales have been quite robust lately, yet production of computers, communication equipment and semiconductors are posting larger gains since the beginning of the year. The chart below depicts average monthly growth rates over three-month periods (to smooth out monthly fluctuations). Perhaps the weakness in the high tech area has been overstated as investors compare current results to the boom years of the 1990s.

Perhaps industrial production will not grow as rapidly in July as it did in June. The Philadelphia Fed's business outlook survey fell to 6.6 in July from a level of 22.2 in June. Any index level over zero still reflects an expanding manufacturing sector, but it could mean a moderation in industrial production growth for the month. It is well to note that many manufacturing firms shut down for a few weeks during the summer to retool. This would be considered in the seasonal adjustment factor, but retooling periods are never exact. Thus, a slowdown in July may be tied to retooling, and not a signal of a decided downturn in manufacturing activity.

Trade gap widens
The international trade deficit on goods and services widened in May to a level of $37.6 billion after suffering a shortfall of $36.1 billion in April. A larger trade deficit acts as a drag on GDP growth because import demand is exceeding export demand. Clearly, it is better for American workers when exports increase and more goods are produced domestically. However, consumers benefit from a large variety of goods imported at competitive prices. Recently, investors have viewed gains in capital goods imports more favorably than for consumer goods. In May, both posted healthy increases. Some economists are currently worried that inventory stocks will be replenished by foreign-produced goods rather than domestically-produced goods. That may be the case but since we are seeing healthy gains in production and falling jobless claims, these worries may be overstated. Also, import growth probably overstated underlying demand as importers tried to get ahead of a potential longshoreman strike (which was averted). This boosted the May level, but could dampen June imports as an offset.

Consumer prices remain subdued
Both the total CPI and the core CPI posted 0.1 percent increases in June. This allowed both measures to show a slower pace of inflation for the year: 1.1 and 2.3 percent, respectively. Declining energy prices over the past several months has helped to dampen the yearly rise in the total CPI in 2002. The 2.3 percent yearly rise in the CPI excluding food and energy prices is the lowest year-on-year price rise since April 2000. This decided lack of inflationary pressures gives Federal Reserve officials lots of room to maneuver during these difficult times. For instance, if the inflation rate were accelerating, the Fed would feel compelled to start raising the federal funds rate target more quickly. Even though economic figures are generally on the upswing, Fed officials can keep rates on hold for a longer time period. (Although, perhaps equity investors would prefer a rate hike, thinking that Fed officials are seeing signs of life in the corporate sector.)