Wednesday, September 19, 2007

September 19, 2007

Welcome to the first posting of the Be Your Own Economist (R) blog. Its purpose is to stimulate your interest in recent developments that affect the economy and the investment climate, such as bulletins released by the government's data mill (see the discussion of today's housing report below). That will help you become your own economist by placing recent data in historical perspective for a broader and deeper understanding of current events. It will also enhance your ability to discuss recent developments with others on Be Your Own Economist's (R) Discussion Board.

Let's begin.

Yesterday the stock market reacted enthusiastically to the Federal Reserve's interest-rate reduction.

But today's Census Bureau release of housing starts data provides no reason to rejoice ( Housing starts fell to 1.3 million in August, about a million less than their recent high in January 2006. Housing starts' slide is ominous. Chart 20 reveals housing starts' collapse leading up to the 1990-91 recession. Are we headed the same way now?

The Census Bureau's report breaks out single-family construction at 988,000 for August. (Apartment-house construction accounts for the difference between the 1.3 million total and the 988,000 single-family figure.) The single-family figure hasn't been as low since 1993.

When you think of all the activity pulled by the housing-starts engine, e.g. lumber and building materials, appliances and furniture and furnishings, you can understand the cause for concern. Construction pulls a long train.

Charts 20, 24 and 25 reveal that the Fed avoided a housing-starts meltdown at the time of the 2000-2001 bust by slashing interest rates. The recession hit, but was mitigated by housing growth. Can the Fed reverse housing's current slide by reducing interest rates? That depends upon the extent to which high rates are today's problem, and the extent to which a drop in rates could stem housing's slide. Remember that the bursting of a speculative bubble instigated housing's recent collapse. When prices soared in an orgy of irrational exuberance, sales finally slowed and so did building. Now that prices have started to fall, potential buyers continue to hold back. Why buy today if the price may be lower tomorrow?

The Fed can't directly affect housing's price erosion, but it can mitigate mortgage-market stringencies by reducing interest rates. Lenders are more cautious today than they were at the peak of the boom, and that reduces all buyers' access to credit. Lower interest rates can offset that.

But housing is not the only fly in the economy's ointment. Profits and profitability, consumer confidence, business investment in new equipent and employment data all show that the current economic expansion is getting tired. Future blogs will deal with these data as they are relaeased. Stay tuned.

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