Sluggish Home-Building Signals Slowing Economy

Aug. 16, 2006 — -- Two major economic reports out today seem to show that the economy is slowing and that prices -- excluding the volatile food and energy sectors -- are moderating.

The Bureau of Labor Statistic's monthly look at retail prices shows that during July we paid about 0.4 percent more than we did during June.

When you strip away energy and food prices, however, consumers actually saw a moderate 0.2 percent dip in price growth.

Both measures of the CPI were aligned with the consensus estimate of economists.

On the housing front, builders broke ground at a seasonally adjusted annual rate of 1.795 million new homes during July.

That's a year-over-year drop of more than 13 percent -- a sure sign that the heat is coming out of the U.S. housing market.

Local governments issued building permits at an annual pace of 1.747 million units, 21 percent below last year's rate.

Building permits are a good indicator of future activity, so expect the cool-down in housing to continue over the coming months.

So What's This Mean for Me?

Taken together, these reports seem to back up the Federal Reserve System's contention that the economy is slowing and that inflation pressures are dissipating (ever so slowly).

If you own stocks, today's numbers -- taken with Tuesday's "good" wholesale price report -- are great. Wall Street is rallying.

Why? Economist Peter Morici offers a concise explanation: "The slowdown in new-home construction is shaving more than 1 percentage point off GDP growth. That should give the Fed considerable pause about pushing up interest rates further and give the stock market a lift in the months ahead."

One area of concern, though, is popping up in the CPI report: energy prices.

As of today, the cost of energy looks to be on track to see an annual price increase of more than 25 percent!

Last year, when inflation concerns came into focus, the energy index saw prices go up just more than 17 percent.

Expect the Fed to continue with the "pause" on rate hikes at its next meeting, but should we see core consumer and producer prices heading higher in the next few months, we might have at least one more rate hike before 2006 ends.