Recent economic data

Hello everyone!

Today brought some interesting economic news. For example, housing starts were up 17.2% vs. an expected rise of 7.0%. Housing starts represent the building of new houses. First, the actual number up vs. the predicted number up is significant. It is extremely rare that you see such an extreme outperformance in an economic statistic. Second, builders frequently begin building houses without a firm order for the house – so called “speculative builds.” Why is this important? Because “spec builds” need financing from somewhere, either the company finances the build from internally generated funds, or a bank finances the builds. People do not invest money unless they are confident of a positive outcome. So the fact that housing starts were up dramatically in May is a very strong sign that all of the panic of late ’08 and early ’09 is over.

Separately, there has been a tremendous amount of fear that all of the liquidity (i.e. money) pumped into the economy by the government bailout and economic stimulus would lead to high inflation, such as that witnessed in the late 1970s and early 1980s. So today’s report of the May Producer Price Index (PPI) being down 5% compared with last year’s same number was good news. It indicates that prices are actually falling, not rising. What’s more May’s number compared to April’s number was only up 0.2% rather than the expected 0.6%. Again, this is great news.

Lastly, there is some economic news out there that is not positive. Housing inventories still remain far too high. In fact there is about 10 months of inventory nation wide. What that means is that if no new houses were built for 10 months that it would take 10 months of home purchases to absorb the inventory. This overhang of home inventories contributes to depressed home prices. You see it is simple supply and demand economics. Too much supply relative to demand = lower prices.

In conclusion, it’s my strong opinion that the economic panic is over, the bottom has been reached, and that the economy is reconstituting itself.

I hope that each of you has an excellent day!

J