CONSTRUCTION
Return to normal
The economy’s high-octane engine, fueled by a steady diet of low interest rates, is supposed to be revving up to full speed as the expansion approaches a year in length.
Unfortunately, not all cylinders are humming. Laggards include the travel industry, notably the nearly bankrupt air carriers; a hapless telecom sector; and all companies that cater to business spending. Yet home construction seems invincible.
Get ready for slight evidence of weakening in Wednesday’s report of October housing starts. Economist Sung Won Sohn expects it to show a drop of about 9 percent, to an annual rate of 1.675 million units from 1.84 million in September.
“This is not so much a decline as a return to more normal numbers,” said Sohn, of Wells Fargo & Co. in Minneapolis.
He said there are signs that the market for luxury condos is losing momentum, but there still is remarkable strength in affordable single-family housing.
Conversely, Sohn added, “builders are starting to show some reluctance about getting involved with smaller houses, because profit margins are razor-thin.”
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Weakness also is seen in construction of multifamily buildings, he said.
“Apartment vacancy rates are rising all over the country. Some landlords are providing incentives to their tenants, simply trying to hold onto a base of renters.”
CONSUMER PRICES
Benign outlook
A spike in costs at the wholesale level, as seen in Friday’s stunning 1.1 percent leap in the producer price index, prompted economists to trot out a word barely uttered in months: inflation. The next question is whether a similar upsurge will be seen in Tuesday’s October consumer price index.
Chicago investment manager William Hummer says there is “no chance that the wholesale inflation report will translate to consumer prices.” He is calling for a rise of 0.3 percent.
Hummer, of Wayne Hummer Investments, says the benign price picture will continue because “corporations have no pricing power. There is absolutely no evidence that inflation will return.”
One positive, he said, is that the wholesale price jump erases worries about the reverse side of the inflation coin: deflation.
“This confirms that there is no deflation in this country,” Hummer said. “For now and for the foreseeable future, deflation is confined to Japan.”
Although a return of upward price pressures would be bad news for members of the Federal Reserve, who have ratcheted interest rates to the lowest level in two generations, Hummer said, “even if inflation revives, it won’t happen overnight. Short-term rates are likely to stay at current levels for six months, and perhaps longer.”
TRADE DEFICIT
Dollar takes a hit
America’s monthly trade shortfall with other nations is so huge that it generates both numbness and disbelief. The intractable chasm rarely creates concern, except in the world’s currency markets. There, the dollar is taking it on the chin, losing about 15 percent of its value versus the euro since the beginning of this year, with lesser losses elsewhere.
Watch for Tuesday’s report on the trade deficit for September to show the gap growing to $39 billion-plus from $38.5 billion in August.
On Thursday, get ready for less than hopeful news from the index of leading economic indicators. Recently, the multifaceted measure of forward-looking statistics has painted a glum picture. It’s expected to show a decline, for the fifth month in a row.
EQUITIES
Industrial funk
The stock market’s No. 1 concern is slow profit growth in the nation’s industrial sector, which led the expansion for about six months but fell into a mysterious funk at midsummer.
Concerns were heightened on Friday, when industrial production numbers showed already slack factory usage weakening. Adding to the anxiety: brokerage downgrades of blue-chip behemoths General Electric and Intel.