Wednesday, December 20, 2006

Nothing to See Here...and.......Why this is a Good Thing

Many economic pessimists took the opportunity to jump on the inflation band wagon based on the headline producer price index jumping 2% during the month of November. Trust me when I say there is nothing to see here, this is a blip due to some sort of data discrepencancy. Inflation is not a threat, the PPI is only up .9% on an annual basis, absolutely nothing to worry about.....

From the WSJ

"The Labor Department's producer-price index jumped 2%, its biggest advance since 1974, as prices for gasoline and light trucks soared during November. The core PPI, which strips out food and energy costs, advanced 1.3% in its biggest surge since 1980. The reading stands in contrast to last week's flat performance by the parallel consumer-price index; but as hair-raising as the numbers appear, economists said the data didn't scan. "Even if there once was a stable empirical relationship between wholesale and retail prices, that relationship is not reliable today," Stephen Stanley, chief economist at RBS Greenwich Capital, wrote in a note. "The gyrations in autos are the most extreme example, but by no means the only one." On an annual basis, wholesale inflation looked restrained. Core prices were higher by just 1.8%, and overall PPI was up just 0.9%."

And good news on housing. What most casual observers don't seem to understand is that housing starts down 30% year over year is great news. This is strictly a speculative inventory correction we are experiencing and the lower the starts the sooner we will reach equilibrium (we may be close), price stabilization, then gradual apprecation. So every time you see starts are down, rejoice, builders are bringing inventory in line with short term demand flux until the sheep get back in.

"In other economic reports today, new residential construction rebounded during November from a 13.7% plunge a month earlier, climbing 6.7% to a seasonally adjusted 1.588 million annual rate. A deeper look at the report showed that the housing sector remains far from turning around, however. Starts are now 29.4% lower than they were at the beginning of this year, according to Steven Wood of Insight Economics. Furthermore, building permits fell for the 10th month in a row, dropping by 3% to an annual rate of 1.506 million."

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