Around the Street
Experts Talk Housing, Inflation, Credit, Fed Policy
What did experts have to say about the data—and other important topics—on Oct. 20? BusinessWeek compiled comments from some Wall Street economists and strategists:
Michelle Meyer, Barclay's Capital Housing starts inched up 0.5%, to 590,000, in September, below consensus expectations of 610,000 and our forecast of 615,000. The data were revised to show weaker starts over the prior two months. The weakness owed to multifamily starts, which fell 15.2% in September, to 89,000, and were revised lower in July and August. In contrast, single-family starts increased 3.9% and were revised higher. This leaves single-family starts up 40% from the trough in January, showing a decisive turn toward recovery. But the 3.0% drop in single-family permits in September suggests that the path of recovery may be bumpy.
We expect housing starts to continue to gain, reaching just over 1 million by the end of next year. This is a somewhat subdued recovery compared to prior cycles, which is primarily due to the overhang of vacant homes on the market, many of which are distressed properties.
Beth Ann Bovino, Standard & Poor's Producer prices fell 0.6% in September, a much larger drop than the 0.1% decline markets had expected, after a 1.7% gain the month before. The core rate, excluding food and fuel, edged down 0.1% in September after increasing 0.2% the month before. Energy prices fell 2.4%, partially offsetting the 8.0% jump in August. Crude goods fell 2.1%, while intermediate goods edged up 0.2%.
The much larger than expected drop in total producer prices, along with the tame core reading, have pushed Treasury yields down further.
Michael Englund, Action Economics Overall, we have seen a surprising acceleration in the pace of bank asset contraction in recent months, alongside an acceleration in the rate of decline for consumer credit, despite the broad recovery under way in securities markets. It remains unclear to what degree this heightened pace of credit contraction is "pulling" versus "chasing" the economy lower, though it clearly signals downside risk to inventory accumulation and gross domestic product growth over the quarters ahead—regardless of the direction of causality.
For the Fed, they will need to assess to what degree they should continue to nurture banks in this post-crisis environment, as opposed to responding with an aggressive exit as security prices rebound alongside rapid growth in the various measures of non-borrowed reserves and money. Their focus will likely remain on the banks, though the risk is that a sustained period of monetary ease will have adverse consequences for security markets and inflation overall.
Edward McKelvey, Goldman Sachs The latest issue of Barron's calls for the Fed to "stop talking about an 'exit strategy' and to start implementing one." It argues that rising asset prices, a weakening dollar, signs of "incipient inflation," and insufficient incentives for saving suggest interest rates should move to a "more normal 2%." We emphatically disagree. Rising asset prices and a (modestly) weaker dollar represent easing in financial conditions—just what the doctor ordered to confront the biggest recession in more than a half-century. As for inflation, we think most signs point towards lower core inflation over the coming year.
Incentives for higher saving are the last thing we need in the short term if the economy is to expand. Recent comments by Federal Reserve officials, as well as a statement on Monday by the Federal Reserve Bank of New York, suggest that as a whole, key policymakers still view tightening as a long way off.