“This whole adjustment process has been orderly and the dollar on a trade-weighted basis is still higher today than it has been for most of the last 25 years,” says US Treasury Secretary, John Snow
Not only that, the “core” CPI is falling, housing starts up to 20-year highs, and industrial production up at its fastest pace in four years. Wow! That productivity-led resurgence and all that monetary and financial stimulus must finally be working its magic and generating a non-inflationary recovery in the US. Keynesians and Monetarist, both, rejoice! Supply-siders let out a cheer!
Hmmm…
For starters, the benign-seeming CPI result was largely an artifact of the rent-of-shelter distortion. The 20%-weighted, implied rental costs (suppressed by high building schedules and record home-ownership rates) declined to their lowest annual pace of growth (2.2%) in at least two decades, something whose effect on the overall index can be seen in a comparison of the service component cum (2.9% yoy) and ex (3.7% yoy) rent of shelter.
As for housing starts, we certainly have to commend the bravura of the nation’s homebuilders, who seem to have undertaken project work which–if the latest selling prices were to hold through to completion–would require a massive $517 billion outlay to turn them over; a sum 30% up on this time last year and twice the previous cyclical peak in nominal, and 30% more in real, terms.
With the MBA statistics showing the increasing desperation of both mortgagees in general—and refinancers in particular—in the form of ARM ratios of 29% and 49%, respectively, it remains to be seen whether this will turn out to be another credit-fuelled triumph of hope over expectation.
The industrial numbers were more impressive, it is true, though, if we were to quibble, the hefty surge in furniture and appliance output has its roots back in the same phenomenon of the housing bubble; business equipment was significantly boosted by farm appliance spending (higher depreciation allowances x a falling dollar x world grain price increases are clearly persuading farmers to take steps to avoid handing back too much of their subsidies in the form of tax this year); and higher tech output will only be seen to be sustainable if several esteemed commentators’ concerns about another orgy of ‘channel stuffing’ currently taking place are ultimately proven wrong in the coming few months.
