This morning’s updates on consumer inflation and housing construction for September offer some additional support for my previous post on thinking that September won’t be seen as the start of a new recession. The quick summary: housing starts rose 15% last month, the fastest pace since January; consumer inflation slowed, but only marginally, suggesting that disinflation/deflationary forces related to economic contraction remain minimal.
Today’s rise in housing starts is certainly welcome, although one number alone doesn’t change much in the grand scheme of the macro trend. The best you can say with September’s pop in new starts is that it adds a bit more heft against the case that another downturn is upon us. Even so, the number du jour for starts could easily turn out to be noise, as the chart below suggests. Also, the mildly encouraging news on starts was offset by a 5% fall in new building permits for September, implying that the great slump in residential real estate will drag on.
Today’s housing numbers, in other words, are a mixed bag. But that’s better than a clear sign of fresh deterioration. As such, it’s a touch of good news on the margins in the delicate art of real-time analysis of recession risk.
As for consumer inflation, the CPI rose 0.3% last month on a seasonally adjusted basis, down slightly from August’s 0.4% rate. For the year through September, CPI is higher by 3.9%. That’s the fastest pace in three years, although it still looks rather middling over the longer term. The average annual rate of change for annual inflation was 3.1% for the 20 years before the onset of the Great Recession—a period widely hailed as an era of contained inflation. Meanwhile, core inflation (less energy and food) is rising by 2.0% a year as of last month, at or near the upper range of the Fed’s unofficial long-run target.
Some analysts will argue that inflation’s rise of late is bad news, but as I explained a few days ago that line of reasoning in the current climate is misguided. Until the economy makes more progress in recovering from the blowback of the Great Recession, inflation expectations and the outlook for growth are positively correlated to an unusually high (and unhealthy) degree. As economist David Glasner observes, “investors don’t fear inflation, they yearn for it.”
“My view is that this worst-case scenario is less likely than it appeared to be a couple of months ago,” says Atlanta Fed President Dennis Lockhart. “I don’t expect a double-dip recession” based on “recent positive surprises in the data.”
Not everyone agrees, and it’s too early to dismiss darker predictions completely. “If the Europeans can’t solve the problem within a year, we are likely to have another worldwide recession,” warns Dale Mortensen, a Nobel-prize winning economist. “So it’s very important for all of us to resolve that problem in the short term.”