Tuesday, August 16, 2011

Housing still flat, but manufacturing is picking up

Housing starts essentially have been flat for two and a half years, at the lowest levels in recorded history. There is anecdotal evidence that residential construction activity is picking up in the remodeling category—I should know since we have been doing a bit of that ourselves—but so far there is no sign of life in the new construction industry. The longer this goes on, the smaller the excess inventory of homes on the market, and the more that new construction will have to ramp up in the future to catch up with ongoing housing formations that almost surely exceed the current pace of housing starts.

U.S. industrial production in July proved to be much stronger than expected (up 0.9% vs. expectations of up 0.5%), and May and June numbers were revised higher. Over the past three months, production is up at a 6.1% annualized rate, which is close to the rate which prevailed in the second half of last year. It's pretty clear that the soft patch earlier this year—triggered by supply chain disruptions following the Japanese tsunami—has passed, and activity is gearing back up. Although Europe appears to still be lagging, there is no sign here of any double-dip recession in the U.S. This underscores the likelihood that the recent equity selloff was inspired almost entirely by fears of PIIGS-related financial troubles in Europe, and was not based on any evidence of a downturn in the the U.S.

I've featured this last chart before, even though it is somewhat of a curiosity. The Phillips Curve theory holds that high levels of capacity utilization—which correspond to low levels of resource slack—cause inflation to rise, and vice versa. As the chart shows, the fit between capacity utilization rates and inflation (with inflation taking about 17 months to respond to changes in utilization rates) was very strong in the 70s, but much less strong (even nonexistent some would say) in the 80s and 90s. My explanation for why this is so is twofold: first, while the correlation was strong, it was not necessarily because of causation; and second, monetary policy was very reactive in the 70s, and very proactive in the 80s and 90s. Proactive monetary policy anticipates changes in inflation, and thus dampens inflation over the course of a business cycle, whereas reactive policy only augments inflation.

Monetary policy has since become more reactive in the 00s, which helps explain why the correlation between inflation and capacity seems to be picking up. If that is indeed the case, then the big improvement in industrial production augurs for a meaningful pickup in core inflation in the next year or so.


McKibbinUSA said...

If the world soon adopts some new gold or commodities based currency (as I believe it will), then US monetary policy will become irrelevant...

John said...

From the chart it looks like a 10% increase in capacity utilization corresponds to a 1% increase in inflation.

Benjamin Cole said...

A pick-up in core inflation is coming?

And the Cubs may win the pennant?

TradingStrategyLetter - Weekly Summary said...

The chances of 'managing inflation' is like herding cats - especially when it done by 'elected' leadership who have done anything but manage their responsibilities. Fed heads are doing their best to tempt the inflation genie from the bottle in the perverse hopes that it will be a painless and easy pancea to eradicate all the irresponsible spending debt that has been accumulated.Inflation only wipes people out!

Benjamin Cole said...


How do you explain the moderate inflation rates from 1980 to present (and now we may be in deflation).

What it super-expert management by the Fed? Miracle-work?

Or is the usual horror story about all monetary stimulus turning into Zimbabwe just a crock?

Do you realize the CPI is up 2.6 percent in the last three years?

Benjamin Cole said...

BTW, some very sad hate-mongering today by GOP candidate Rick Perry, Governor of Texas.

"Texas Governor Rick Perry, the latest entrant in the fight for the Republican presidential nomination for 2012, said it would be “almost treacherous -- or treasonous” for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.
“If this guy prints more money between now and the election, I don’t know what you would do with him,” Perry said yesterday at a backyard appearance in Cedar Rapids, Iowa. “We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous -- in my opinion.”

I call on all lovers of economics to refute and denounce this terrible hate-speech by Rick Perry.

Surely we can have policy differences without this sort of bile--especially from someone who could end up as President.

I keep saying it--can't we find another political party to vote for?

TradingStrategyLetter - Weekly Summary said...

Do you actually believe in future stable pricing and standard of living environment when you are facing $20+ Trillion in debt - $100+ Trillion in combined debt? How does the stable manageable fiscal picture look at 5, 10,15, 20, 25% interest rates? Do you actually think the S&P downgrade is nothing? What happens when the US loses reserve currency status? Does the national debt load per person and per family not give you a slight hint about future standard of living decreases? This is nothing like the 80's or 90's - a period of 'relatively' much healthier fiscal concerns and respect for tax payers. Today the only strategy for growth and financial mangement is to gas the tax payer with further 'stimulus' and debt expansion. Gold just hit $1,800/0z. The CME is masking the full price effect with indiscriminate political margin increases. Don't worry. Prime time inflation is coming at us like a tsumnami. Anyhing in it's way get's wiped out and it won't be fun! The only thing being done by the fearless elite political leadership leadership is rearranging the deck chairs on the Titanic. The band is still playing for now!

TradingStrategyLetter - Weekly Summary said...

It absolutely stuns me when people (not parties) like Perry speak the pure unvarnished truth. I believe that this issue breaks down to basic math. Big government is ALWAYS a disastor ANYWHERE! Only those who think that throwing good money after bad is a good idea disagree. All that is being really done is the borrowing and mortgaging of future generations for the pleasure and satisfaction of the current coddled and spoiled generation. It is the Keynesian fallacy of trying to do good by taking from others.

Benjamin Cole said...


I encourage Perry, or anyone else, to speak their mind on economic issues.

What was incredibly foul and lamentable was Perry's idiotic statement that Texans would do harm to Ben Bernanke for the Fed Chief's choice of monetary policies.

This was the rantings of an unhinged nut, not a viable candidate for the Presidency of the country.

Maybe next time we see Perry he will be wearing jodhpurs and shiny boots, and suffering from involuntary arm spasms brought on by martial music.

TradingStrategyLetter - Weekly Summary said...

I not a Texan or even an American and I think that was an understatement. A major 'principals' shakeup and change in critical thought process is despirately needed. The US will get zero sympathy if the good ship blows up! The future of your great country hangs in the balance!

John said...

Some of us old duffers "seasick" from market volatility and still having a few bucks socked away would be fine with permanent high unemployment and some good old 30s style deflation.

When everybody else is broke we can hire the young folks to clean house and pay them off with a few packs of ramen noodles. We may as well finish this thing out with the lifestyle we deserve.

Benjamin Cole said...


Be careful what you wish for.

jj said...

Scott, I've seen many estimates on housing 'shadow inventory' but have never seen an estimate of 'shadow households.' Curious if you might have seen something. Thx.

McKibbinUSA said...

Money is not losing value, only credit -- more at:


mmanagedaccounts said...

Benjamin, the CUBS might win the pennant next year. And that's when inflation will be picking up.

McKibbinUSA said...

The "great inflation" has already arrived -- the dollar has lost half of its value against gold in the last year alone -- oh yes, the great inflation has already arrived (less food and energy of course)...

Jeff said...

Perry wasn't speaking "hate speech"...it's call speakin Texan.
Give me a break with the 'look at the mean Republican crap'.

Mark Holder said...

So what explains the weak ISM numbers if industrial production is picking up. Does this further auger that ISM reports are more sentiment than fact?

Guess I need to do some more research on this.

Charles said...

An unemployed construction worker does not necessarily sit around for 99 months, eating pizza, drinking beer and watching TV. Remodeling for cash under the table can be very attractive as time passes W and benefits run out.

I suspect that the untaxed and unregulated cash economy is growing while businesses remain extremely reluctant to hire. We can expect it to grow rapidly if Obamacare is ever implemented.

Benjamin Cole said...


Hey I lived in Texas for two years. I love Texans.

But Perry? Listen, he sure came off as the vile excretum from the bowels of the south portal of your fine state. His "speakin" was the rantings of a bilious knave.

You should've brung someone better than Perry to the national party.

TradingStrategyLetter - Weekly Summary said...

Vile excrement sounds much more offensive to me. Typical of this 'modern' Keynesian generation of borrowers and spenders who simply don't like the tough message. 'Do not question the integrity of our Fed wizard and his magical currency printing machine! It is the easy painless solution without consequence that will keep me in a life style which I have grown accustom. Who really cares about the savers and those who live prudently in a fruitless effort to bail out the spendthrifts anyhow?? Tax the rich and increase the debt ceiling so that 'I' can have and don't have to give!' It is time to pull back the Fed 'curtain' and see what the heck is really going on in the ledgers! The fabulous Obama promised an administration of 100% transparency. Bring it on!

John said...

"bilius knave"...love it.

Let's try to remember that the Fed has a dual mandate: maximize employment and price stability. Bernanke didn't make the rules; he's doing his job. Neither of those missions is necessarily "business friendly."

TradingStrategyLetter - Weekly Summary said...

North Korea has a 'business unfriendly' mandate too. Maximun employment(100%), total price stability, and a 100% tax rate. Anybody know how it is werkin' for them?

Benjamin Cole said...


Like Perry, you are improperly conflating fiscal and monetary policies.

One can be for a balanced federal budget (as I am) and for an aggressive monetary policy (as I am).

I go even further--I would like to see federal outlays, as percent of GDP, dropped down to 16 percent.

What was so offensive about Perry's comments was not the gigantic pig-pile of ignorance they displayed, but the whiff of jackboots and extremism.

I am surprised Perry isn't wearing jodhpurs for the duration.

Really---haul Bernanke up on treason charges?

Perry revealed himself as a loose cannon (with a loose screw, to boot), one that should be kept as far away as possible from the captain's wheel.

I will concede the GOP field is exraordinarily weak, and even a bit off-putting. But there are candidates, such as Mitt Romney, that appear palatable.

I am no Obama fan.

Actually, I just hope a third party emerges soon. These two parties have run their course, and are more interested in destroying each other than the national purpose.

TradingStrategyLetter - Weekly Summary said...

Don't look now but I think there is a fairly 'totalitarian' regime in charge currently. The rate of the loss of privacy and liberty is stunning. The real 'threat' IMO was Washington's 'shut your mouth' response. They are doubling down with the public debt and trillions of dollars of 'future' obligations and all they want is for everyone to shut their mouths. Got it!

Jeff said...


A third party would mean perpetual liberal rule...ala Perot. No thanks.

I am not a Perry fan. I think he is an empty suit. But a mormon in the white house is not an option (and he is not conservative).

Newt has imploded. Paul cant get elected.

I liked TPaw...very surprized he dropped after a straw pole where 16k voted!

Cain has had too many gaffs. Huntsman is a not factore picked by the ruling GOP class.

I could see Santorum as Prez...he's pretty conservative.

That leaves Bachmann who has voted the way I would vote virtually every time! In fact, there are many times I think she is the only one who really gets this whole liberty thing.

In the end, any of them will be better than what we have!

PS I'd do "cap" at 16% of GDP. Sounds good to me. No who above is most likely to make that happen?

Scott Grannis said...

How about Paul Ryan for Pres? His only negative is his youth.