The price of a barrel of crude oil was about $30 lower last week than only about a month ago. Gasoline is down about 25 cents per gallon. The stock market has rallied. Bond yields came down about 20 basis points. But the economy remains very weak. What's wrong with this picture?

Prices have backed off because demand is so weak. Drivers are taking shorter trips and/or fewer of them. Some have even left the car at home and taken a bus or a train (a hearty few have jumped on a bike). Food prices are a different matter. The flooding in the Midwest didn't do as much damage to crops as once feared. In both cases, some of the speculative premium has been washed out of prices. But the fundamentals driving up prices or keeping them high has not changed. Ultimately, this means the inflation potential in August is not much different than it was this past spring. Nor is the economy poised to be any stronger.

Tuesday, August 19, 2008

8:30am Housing Starts and Building Permits (Bureau of the Census)

Home building fell below 1 million units in March (annualized) and has remained close to that level ever since. That didn't change in July and isn't likely to change, perhaps right through the fall. Home building is not slowing, but it is easily a year away from turning around and starting to recover. Home prices will take even longer to turn around.

8:30am Producer Price Indexes (Bureau of Labor Statistics)

Material cost increases (especially for metals and chemicals) are keeping the monthly rise in the "core" PPI (which excludes food & energy) in the 0.2-to-0.4 percent range. That probably will continue. Energy prices have backed off and so have some food prices (wheat, corn, even cheese). But the same is not true for metals — or perhaps not yet.

Thursday, August 21, 2008

10:00am Composite Indexes of Leading, Coincident and Lagging Indicators (The Conference Board)

The Leading Economic Index was soft through the first half of 2008. The Coincident Economic Index, which tells us where we are right now, has been flat to declining over the past four months. What change, if any, was there in July?

Economies across the globe are facing soft growth and rising prices. In the U.K., the fear is that weak consumer spending could intensify. Japan's economy is even softer: GDP fell by 0.6 percent in the spring quarter. It could be contracting again this quarter. High energy, metal, and food prices are taking their toll across the globe. And the Leading Economic Indexes suggest the world economy will continue to lose a little steam, perhaps right through the second half of 2008. So why aren't central banks lowering interest rates to try to stimulate demand?

Two reasons: First, even with the drop in energy prices, the inflation potential remains relatively strong — too strong in the eyes of most central bankers to warrant cutting borrowing rates. But the second reason is that with economies so soft, and bank solvency of more than a little concern (as the recent panic associated with Fannie Mae and Freddie Mac showed), banks are tightening on lending conditions. In other words, even if the central banks lower borrowing costs, it is not clear more loans would be floated. Finally, that's not a bad thing. Over the past half decade, credit growth has exploded. A pause, to let bank capital grow, might help insure that once the global economy is back on its feet, it can be sustained.