Wednesday 20 April 2005

US March PPI and housing starts

Producer prices in the US rose 0.7 percent in March, the Labor Department reported yesterday. However, core prices, which exclude food and energy, increased only 0.1 in March.

At the same time, the Commerce Department reported that housing starts fell 17.6 percent in March to a seasonally adjusted 1.837 million annualized units.

Some reactions on economics blogs:

Bill Cara: Economic data is a downer
PPI data was higher than expected, but on trend, and housing starts were at a record low since 1991, down 17.6 pct. What this means to investors is that manufacturers are passing costs through to buyers, which will result in higher CPI numbers, and also a continuation of rising interest rates.

The lower housing starts reflects an unwillingness by homebuilders in America to build on spec, as they fear that buyers are running out of financial resources, and may in fact be afraid that rising interest rates will soon be reflected in higher mortgage costs, which would finally pop the bubble in some housing markets.

What remains to be seen is the period of time home sellers need to sell. If and as that required sales period stretches out, home prices will start to decline, as some homeowners panic that future mortgage costs will exceed their ability to pay.

That, in certain regional markets, will be the proof that the housing bubble has popped. All of which (i.e., liquidity concerns) presages lower equity prices to come. I’m a little surprised that pre-open equity futures (Dow +32; Nasdaq +10) remain strong.

Macroblog: The PPI Report: Headline Bad, Core Good
A funny thing happened on the way to a pretty bad March PPI report -- the experts shrugged. Why?... [E]veryone was expecting the big push from energy prices. That the effects on prices did not extend much beyond that sector has made some people positively giddy... I think there is a reason that the market has chosen to look through the headline figure to the ex energy statistic: Fed credibility...

Macroblog: If You Were Looking For The Housing Market To Cool -- Congratulations!
... But don't despair -- or do despair, depending on your perspective: "... housing starts remained at a high level, and within the 1.6m-2.3m range of the past two years..." Nonetheless, the folks at Briefing.com say yeah, but: "The starts decline may have been exaggerated by weather condition, but the housing market is clearly leveling off (at best)."

Calculated Risk: Housing Starts
... Usually sales are a better indicator than starts, so look for the New Home Sales announcement next week... I believe speculation is the key to any bubble... [S]peculation removes the asset from the supply...the price increases... [W]hen the speculator sells, the supply increases...future price will fall... [I]f the price does not rise, the speculator must either hold onto the asset or sell for a loss. If the speculator chooses to sell, this will add to the supply and put additional downward pressure on the price.

The PPI reading doesn't surprise me too much. Low core inflation and high energy prices are consistent with globalisation and the emergence of low-cost producers in China and India. In other words, there is upward price pressures in some areas but downward price pressures in others.

As for housing starts, it does look like the housing market is about to cool, but it is still at a high level and it cannot be assumed yet that prices will necessarily fall and not merely level off.

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