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  • 3-16-2011: FOMC, PPI, Housing Starts 0 comments
    Mar 16, 2011 2:37 PM

    The FOMC, with a unanimous decision, kept interest rates unchanged.  Despite gasoline reaching $4/gallon in some cities and warnings from manufacturers about rising input costs, the Fed reasoned these are transitory in nature.

    Whether transitory or not, they represent real costs to Americans every day right now.  Higher gas prices mean we spend more on gas and less on other things.  Our purchasing power diminishes along with our standard of living.  The Social Security tax break passed late last year was meant to put a couple extra bucks in our pockets every week; $1000-2000 a year for average Americans.  While I approved of the tax cut, unfortunately, for most Americans, any extra cash they received will flow straight into their gas tank now.  Still, Fed Chairman Ben Bernanke remains optimistic for the U.S. economy citing an economy on “firmer footing” and a labor market that is “improving gradually.”

    I am not convinced the labor market is improving.  The unemployment rate at 8.9% is improving psychologically, but the actual reality isn’t so rosy.  The unemployment rate is decreasing because the labor force participation rate decreased to 1984 levels; not because we created hundreds of thousands of jobs.  When hundreds of thousands of people give up looking for jobs and earn no income, I see a worsening labor market. 

    In fact, some economists want to see an uptick in the unemployment rate because that would signal discouraged workers now have hope to go look for a job because of improving conditions.  I agree with those economists.  Until the labor force participation rate increases, I will remain skeptical.

    The Fed will continue QE2 probably till the end.  They also made it a point to say they will keep short-term interest rates close to zero for an “extended period.”

    The Producer Price Index, which measures how much manufactures and wholesalers pay for goods and materials, rose 1.6% in February.  Energy prices rose 3.3% and food prices rose 3.9%.  Yet, the core rate, which the Fed will concentrate on, rose .2%.  At some point, the higher input costs will make their way to consumers.  I don’t know when this will happen, but a few companies already made the leapt; Whirlpool and Electrolux, for example.

    Housing starts, the number of new homes being built, fell 22.5% last month to 479,000 from 618,000 in January.  It was the largest monthly drop since March 1984.  The building permit indicator (permits for future construction) fell 8.2% to an annualized rate of 517,000, the lowest in 40 years.

    As the demand for new housing starts remains low, the demand for steel, wood, electricity, glass, plastic, wiring, piping, and concrete will also stay low.  Construction workers and tradesmen will continue to struggle finding work.  The American economy relies on the multiplier effect of the housing industry, and until this part of the economy picks up, it will continue to be a drag.

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