Uncertain economic conditions amid concerns over global housing market

Yesterday's news was somewhat mixed.

In Asia, Japan's core private-sector machinery orders reportedly fell in April, but by a smaller-than-expected 1.0 per cent, while China's fixed-asset investment in urban areas rose 26.4 percent from a year earlier in the first five months, accelerating from the 25.7 percent gain for the first four months, but investment in real estate slowed to 24 percent from 26 percent in the first four months and 30 percent last year.

Meanwhile, in the UK, retail sales rose by 1.3 percent in May from the same month in 2004, the slowest growth since January 1999.

Yesterday's news out of the US was also not as positive as those from the previous day.

The Federal Reserve Bank of Philadelphia's business outlook survey index of manufacturing activity fell to -2.2 in June from 7.3 in May. This is the index's first negative reading in 25 months. Set against that is that the index for future activity increased from 22.3 in May to 30.6, its highest reading in six months. And in line with the moderating inflation picture, the indices for prices paid and received both fell.

In other news, jobless claims rose by 1,000 to 333,000 last week, while the four-week average rose 2,750 to 335,000. US housing starts in May rose by a less-than-expected 0.2 percent, while permits for future groundbreaking fell a larger-than-expected 4.6 percent.

Brad Setser takes a look at the global housing market bubble, as does The Economist. Both point the finger at low interest rates as a key factor for the housing boom.

"Japan provides a nasty warning of what can happen when boom turns to bust," The Economist said. "Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991."

And although low interest rates have been a factor in driving up house prices, The Economist says that "contrary to conventional wisdom, it does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline", citing the cases in Britain and Australia.

Speaking of interest rates, David Altig looks at the federal funds rate and concludes that the Federal Reserve "faithfully -- and consistently -- pursues both" aspects of its dual mandate of price and output stability, which, as he admits, is not the same as saying that it "behaves...optimally".