Housing starts disappoint
Housing starts dipped 2.2 percent in August after declining 2.8 percent in July, bringing the level down to a 1.61 million-unit rate, the lowest monthly pace since April. Despite the downward trend for the past three months, total housing starts are still 3 percent above year ago levels. In the first eight months of the year, housing construction, having benefited from lower mortgage rates, is 3.8 percent above the same period last year.

While market players may be disappointed with the August dip, economists aren't likely surprised that housing activity is beginning to moderate given that construction was so strong for so long, even during the recession last year. The housing market was a major force behind economic growth this year, and market players are worried that the momentum has stalled. Even if housing starts were to remain near current levels, they wouldn't kick start GDP growth as housing investment did earlier in the year. This could also hurt retail spending on furniture and home appliances in coming months. If housing construction stops growing, there will be more pressure to see improvement in other sectors of the economy such as capital spending.

Production falters in August
The index of industrial production fell 0.3 percent in August, its first monthly drop since last December. Despite the monthly decline, the year-over-year rise in production was 0.4 percent in August, matching the previous month's gain. Judging by the sharp declines of the past two years, production has a long way to go before it recuperates what it has lost during the recession. The capacity utilization rate inched down to 76 percent in August, also posting the first drop in eight months.

A good chunk of the weakness stems from a 2.5 percent drop in utilities production, although this follows two strong monthly gains. Manufacturing production dipped 0.1 percent while mining gained 0.8 percent, reversing the previous month's entire decline. Among major product groups, both consumer goods and business equipment recorded declines in August while construction supplies managed a modest rise. Materials were down in August as well. High tech industries performed well in August, rising 1.6 percent for the month, much faster than the previous two months combined. Production of semiconductors and related electronic components are behind this gain since communications equipment is still declining. Even though motor vehicle sales have been booming, production of motor vehicles and parts fell 1.4 percent in August. Seems that automakers were trying to get rid of old inventories and not ramping up on 2003 model year car production.

The Philadelphia Fed's business outlook survey suggests that perhaps industrial production will turn positive again in September. Any index level above zero reflects a growing manufacturing sector in the Philadelphia Fed's district. It tends to mirror production in the national economy. The September uptick in the Philly Fed index was not particularly exciting, but it was positive. In the past 2-½ years, the index has erred only twice in predicting whether industrial production will rise or fall during a given month (July & November 2000).

Trade deficit narrows in July
The international trade deficit on goods and services narrowed in July to $34.6 billion after recording a shortfall of $36.7 billion in June. Exports rose for the fifth straight month while imports recorded its first monthly decline since last December. Exports recorded its first year-over-year rise in July in 15 months. Imports have risen for the third straight month. The gains in imports reflect the improving trend in the U.S. economy. The strength of import demand, however, may have been artificially boosted by an anticipated longshoreman's strike on the West Coast that was averted. This may be a reason that imports actually declined in July. The longshoremen have not yet negotiated a new contract. Since July, they have been operating without benefit of contract and under threat of worker slowdowns. This could continue to affect international trade data for a few more months.

The chart below shows how important the export market is to domestic production. When the U.S. economy was growing at a gangbusters' pace in the late 1990s, the drop in export demand dampened U.S. production modestly. As the U.S. economy weakened and fell into recession, the decline in export demand played a bigger role in curtailing industrial production. As foreign demand for U.S. goods increases with the weaker dollar, it should help boost industrial production in coming months.

CPI accelerates, but inflation still under control
The consumer price index rose 0.3 percent in August after posting significantly smaller increases in the past several months. The CPI excluding food and energy prices also increased 0.3 percent for the month, larger than recent monthly gains. While energy prices did accelerate, food prices dipped again. Apparel, education and tobacco prices were the major culprits behind the August hike. Apparel prices tend to spike a couple of times of year when retailers change the seasonal clothing mix. Despite the August jump, apparel prices remain 1.7 percent below a year ago. Tobacco price hikes are substantial but don't take place every month. Nevertheless, tobacco product prices are up 12.6 percent from last August but account for a very small portion of the total CPI. The price gain in education costs can't be as easily discounted since education costs are up 6.4 percent from a year ago.

All in all, the CPI figures still point to a peaceful inflation environment. The yearly rise in the CPI of 1.8 percent is low by historical comparison. Incidentally, the Labor Department's new chained CPI index shows that prices were 1.3 percent higher for the month, a full 0.5 percentage points less than the regular index revealed. Incidentally, Greenspan's latest Congressional testimony pointed to inflation using the chained CPI index. The index is not seasonally adjusted and monthly figures are revised (in contrast to the regular index) but it is likely to become the more dominant index among Fed officials.