Encouraging PPI and Housing Data: Has Spring Sprung?

Is the Fed’s liquidity attack winning the war on deflation? This morning’s update on wholesale prices, new housing starts and new building permits offers a few reasons for answering with a tenuous “yes.” Maybe. Even if that's true, we're a long way from a "recovery" that's worthy of the name. But perhaps the blood will run a little slower; perhaps it'll stop flowing altogether. Stranger things have happened.

First let’s take a look at prices. The Producer Price Index (PPI) for February rose a modest 0.1%, the Bureau of Labor Statistics reports. That follows January’s roaring 0.8% jump. And not a moment too soon, in the wake of large back-to-back monthly declines last year in PPI from August through December. A similar run of deflation has weighed on consumer prices as well.

Is it safe to declare the deflation risk over? No, not yet, but it’s not too soon to start thinking about the light at the end of the tunnel, dim though it's likely to be for the time being. We’ve been arguing for some time that the first priority for the economy is nipping deflation in the bud. Without that, broader progress on 1) stopping the bleeding; and 2) laying the groundwork for recovery isn’t possible.

Ultimately, returning the economy to a state of inflation (ideally in a modest dose) is within reach for a determined central bank. Printing money, after all, comes naturally to the Fed and so reversing deflation is possible and even probable. Assuming the leadership pursues the goal. Cranking up the printing presses a bit more--perhaps a lot more—offers a solution. Only timing is unclear. As for minting fresh currency, there’s no question of the recent trend. M1 money supply rose by nearly 24% during the 6 months through last month, at a seasonally adjusted annual rate, the Fed advises. Suffice to say, that’s an unmistakable sign of easy money at a time when the economy’s contracting.

To its credit, the Fed has been aggressively battling the deflation risk, and we’re starting to see some of the fruits of that struggle. Particularly encouraging is the fact that core PPI (excluding food and energy) rose last month as well—up 0.2%. In fact, that’s the third straight month that core PPI has posted a monthly gain.

There’s also good news in the housing market this morning. New housing starts jumped 22% last month vs. January, the Census Bureau reports. That’s the first rise since last June. Meanwhile, new building permits climbed 3% in February, which is also the first advance since June. Since permits are a measure of future activity, it’s clear that someone out there is beginning to respond to the low interest rates and the recognition that the economy will one day (gasp!) expand, if only a little.

No one should overestimate the implications here. Although the news on prices and housing is welcome, it may yet prove to be noise in an otherwise receding economy. Given the extent of the problems near and far, prudence suggests that today’s reports are, at best, a sign of a bottoming-out process for the economy, and an early one at that. Let’s not forget that just yesterday the Fed told us that industrial production continued its decline in February. The negative momentum, despite today’s news, still has the upper hand.

The idea that growth might occur one day soon is still too much to fathom at this point. More likely, the correction will continue to take a toll, as consumers pay for their years of binging by jumping on the savings bandwagon. Indeed, the labor market remains weak and there’s no reason to think that job destruction has yet run its course, as we discussed earlier this month.

That leaves us to look for signs of confirmation that today’s news is more than just a dead cat bounce. We can start by looking at tomorrow’s consumer price report for February, followed by the weekly jobless claims news on Thursday.

Comments

[Archman Inv...:]

<<There’s also good news in the housing market this morning. New housing starts jumped 22% last month vs. January, the Census Bureau reports. That’s the first rise since last June. Meanwhile, new building permits climbed 3% in February, which is also the first advance since June. Since permits are a measure of future activity, it’s clear that someone out there is beginning to respond to the low interest rates and the recognition that the economy will one day (gasp!) expand, if only a little.>>

As an Architect and developer I can tell you without question that today's data was a non-event. Where was all this future activity? Fl, CA, NV, AZ? Hardly.
Markets such as VA, NJ, NY, where housing prices went up a lot and remain grossly overvalued. (How many average americans can afford to buy a home for $650K and pay $15K in yearly property taxes?)
There is still over 11.5 months of supply on the market yet building starts were up and permits were up? That is NOT good news. Not by a long shot. Every single AIA meeting I attend, my fellow professionals say the same thing: Short of being a big international firm, there is little work out there, and any work that does arise, the client is demanding fire sale prices on all fees, creating a race to zero in the pricing arena.
There is of course the possibility (like all numbers that are "reported") that the numbers were artificially inflated since no one in the general public has the courage to challenge the powers that be.
I see today's numbers as just an excuse for the institutions to run up the stock market and attempt to get mom and pop americans to buy stocks during this bear market rally.
Best to all.

Mar 17 04:42 PM

[Spokaneman:]

If housing starts are actually up 22% that is anything but good news. This would be analogous to GM increasing production by 22%, All it would do is add more inventory to an already glutted market.

It wouldn't surprise me though, builders always seem to build a few more houses that are needed then wind up sitting on them for a very long time.

Mar 17 05:42 PM

[Stone Fox C...:]

Isn't part of the deal that with govt screwing around with the stimulus and other programs that buyers were on hold until mid Feb. As usual, with govt meadling the economy continued to crumble. Now that govt appears to be at least slowing down, it isn't too surprising that the markets are starting to move forward. The uncertainty seems to be lifting if ever so slightly.

Mar 17 06:01 PM

[ceekay:]

The gubmint meddling is messing up the thing and let the free market do its thing...yeay

On Mar 17 06:01 PM Stone Fox Capital wrote:

> Isn't part of the deal that with govt screwing around with the stimulus
> and other programs that buyers were on hold until mid Feb. As usual,
> with govt meadling the economy continued to crumble. Now that govt
> appears to be at least slowing down, it isn't too surprising that
> the markets are starting to move forward. The uncertainty seems to
> be lifting if ever so slightly.

Mar 17 06:49 PM

[flashrob:]

the "fake rally" based on "new housing starts" ...here's reality...

driven by "new housing starts" increase by 6%

that's because BUILDERS BUILD...and now it's MOSTLY CHEAP condos (in those numbers).

The reality is: their smart... they know a lot of people WILL BE DOWNSIZING...losing that big McMansion (with the 3car garage) AND WANT SOMETHING CHEAP..."TO RENT!" ...while their foreclosed McMansion adds to the UNSOLD GLUT OF EMPTY HOUSES...

does that sound good for REAL ESTATE... sounds to be like "further deteriorating ASSET vals" for local/regional banks AND THE FURTHER WRITE-DOWNS for the "Real Estate derivatives" of the "BIG FINANCIAL INVESTMENT BANKS."

...EVEN "HOME DEPOT" had a "big rise!"

I guess all those people RENTING those NEW CONDOS...will be SPENDING LOTS at Home Depot...ya know...redoing their new "rental kitchen" or "bathroom" ...or buying a "lawn tractor" ...Oh, wait a minute the APARTMENT/CONDO OWNER will be buying "one new tractor" NOT 100 TENANTS who formerly had McMansions and bought "100 tractors" from Home Depot.

This FAKE RALLY was inspired by the above... SEE HOW MUCH YOU AND THE "HERD" can be driven BY THE SAME PEOPLE who TOLD YOU "BOTTOM" and buy in "while stocks are cheap" ...they have been piping you DOWN for the last two years... and you still run for the "quick (bear FAKE) RALLY" because YOU ARE IN DENIAL!!!

the ECONOMY IS HEADED LOWER AND SO IS THE STOCK MKT... there have been no REAL fundamental improvements to DRIVE A "REAL RALLY."

I personally, don't like what's happening, BUT I AM A REALIST...and as soon as I saw the "new housing starts" number, I SMELLED A FAKE RALLY and profited, by the way...I'm a daytrader afterall, but I'm already OUT.

...these MISLEADING NUMBERS...pumped up by the analysts and spread thru the financials, even OIL went up...

CRAMER, TONIGNT, even called "today's rally" a "cheap linoleum floor" under the mkt, after doing MUCH THE SAME ANALYSIS AS MYSELF... and he's a bull (I saw Stewart's roasting of him, and felt he was doing a little contrition... I did like the new CRAMER...I thought HE WAS DEAD RIGHT ON TONIGHT...and will now watch him to see if he sticks with REALITY!}

Serious, forecasters indicate we appear to be NEARER BOTTOM in the market. They also, warn that there is no reason for BUYING IN YET and "no good reasons" for a "sustainable real rally" driven by sound fundamental logic and numbers.

So, in reality...YES IT'S A FAKE RALLY!

I know some people lost a lot of money in many stocks/sectors on the way down over the past year.

But believing "waffling spin" by the Fed and the Administration, and "feel good" stuff like confidence numbers have slowed...

"consumer confidence" means crap these days, especially to those 600,000 or so people LOSING THEIR HIGH-PAYING JOBS...and the corresponding money THEY SPEND IN THE CONSUMER ECONOMY...

A Jeffries analyst on Bloomberg...was SOUNDING OFF UPBEAT
about the MANY STOCKS IN THE RETAIL SECTOR...

saying banks will loosen credit under Obama's stimulus plan, etc., etc., etc....

PROBLEM is the CONSUMER is maxed out on his credit cards,
(see Amex defaults increase yesterday)...

SO ALL THE INCREASING OF "EVEN CHEAPER CREDIT" is not going to help AN INCREASING NUMBER OF CONSUMERS WHO "DON'T QUALIFY FOR IT!'

if you read the above slowly AND THINK ABOUT IT...

you will realize that IT WAS JUST ANOTHER "FAKE RALLY!"

...based on denial, frustration, fantasy...ANYTHING BUT...

BASIC FUNDAMENTAL ANALYSIS...

flashrob

Mar 17 07:26 PM

[bricki:]

Has Spring Sprung?

Yes, it has sprung a bear market rally. Until fundies stop declining keep some powder dry.

Mar 17 10:01 PM

[tonyb:]

dear mr. p--from various news sources today i learned that the housing starts increase was composed primarily of some condos and mostly apartments. 1] to me this is bad news: a] if you are young and you can buy a house do you sink the money in now, suspecting a futher 15-20% fall in prices, or rent an apartment, and b] if you are elderly, you do what many elderly parents of my friends have been doing--dump the house now and move into an apartment--no more property taxes, no more repair/maintenance bills, upkeep, etc. 2] it is good that banks can borrow at zero and lend and make a profit, however they still hold toxic assets. it is my understanding that with the massive and currently increasing residential foreclosure problem, the rapidly collapsing commercial real estate situation, and the increasing credit card and auto loan default rates, that the banks toxic assets will deteriorate further. 3] a short while ago consumer spending numbers were reported to have increased by a tiny amount, yet i learned that the bulk of the increase was due to increasing gasoline prices. [also, please read comments above from the architect and developer]. i suspect when almost all major news outlets trumpet all this good news without providing the critical details, coupled with the amazingly [seemingly] coordinated vague statements from the ceo's of BOA, Citi and GM [all within a day or 2 of each other], that one can only conclude nothing has really changed substantially for the better. my personal view of a continued rapid spiral downwards towards a depression will remain intact until solid evidence otherwise is forthcoming. thanks. dr.b.

Mar 17 11:55 PM

[Moon Kil Woong:]

Archman82011, thanks for the comment. I surmise that this is the general uptick in housing starts at the close of the winter months. It seems a bit early though. I'd expect it around March but anyway.

Supply is not the issue, demand is. I'll be a lot more confident we are turning the corner when foreclosures drop without some technical stall point like requiring a 60 day notice to get a couple months fake data reprieve.

Regarding deflation, what deflation? Perhaps with the mad money (not the fake Cramer one) government printing machine running full tilt the Fed should consider starting to unwind it's balance sheet and/or raise interest rates before we slam Fed causes into recession #2 featuring our pal Mr. Stagflation.

Mar 18 12:40 AM

[samwise:]

Has spring sprung an inflation surprise is what this article should be titled!

Mar 18 03:34 AM