Even as most economists predict that the US economy is turning the corner, there appears to be some skidding along the bend. Wholesale prices fell again, making their 12-month decline the worst on record. Construction on new homes also fell. What does this tell us about the economy?
Two things. First the drop in prices (including a 0.1 percent drop in core inflation, a more accurate measure for consumer prices) back up the Federal Reserve's position that it can continue pursuing an expansive monetary policy without threatening imminent inflation. Most of the downward pressure comes from drops in energy and food prices. If you're looking for a culprit for the drop in prices, you can point to the job market -- wages are down, part-time work is up, and even as the unemployment is holding steady under 10 percent, hundreds of thousands of people are leaving the work force or exhausting their unemployment insurance. Simply put, despite massive government overlay, US demand doesn't have the strength to push prices up.
The fall in home starts and home completions explains a different part of the picture. Home sales in July were up -- but mostly because home prices have fallen so dramatically. Distressed sales accounted for a third of the market and foreclosures have hit record highs. In short: Until this depreciated inventory is bought up, you're not going to see an increased demand for new home construction.
Yesterday I rounded up some other pieces of evidence that the economy,
while almost certainly moving into positive-GDP territory, still
suffers from quite a lot of drag, from sick banks to an absolutely
hellacious jobs sector. Read it here.
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