The week's economic reports

Consumer prices that are now rising at an annual rate of well over four percent (as measured by the Bureau of Labor Statistics) highlighted the week's economic reports.

Stocks and bonds ended with the S&P 500 Index up 0.2 percent to 1,353, now down 7.8 percent for the year, and the yield of the 10-year U.S. Treasury note rose 3 basis points to 3.79 percent.
Consumer Prices: Led by a 0.7 percent surge in both food and energy prices, overall inflation rose 0.4 percent in January and is now up 4.3 percent on a year-over-year basis. Core inflation, excluding food and energy, rose 0.3 percent last month and is up 2.5 percent from year ago levels.

This marks the highest annual rate of inflation since the hurricane-affected months in late-2005 and, excluding that period, you have to go back to 1991 to find headline inflation at a higher rate.
Earlier in the week, a chart was posted showing the annual rate of "Non-core inflation" (i.e., food and energy only) over the last five years and even I was surprised to see how long these prices have been rising at rates far in excess of the core rate of inflation.

Using the relative weightings as defined by the Bureau of Labor Statistics, the average annual increase for food and energy prices has been 6.9 percent and, as of last month, these prices rose at an an annual rate of 11.9 percent.

As would be expected, the primary driver has been energy prices that have risen at double-digit rates, but food prices have climbed steadily in recent years such that they are now rising at about a five percent annual rate.

During an election year, look for the rising cost of food and energy to get an increasing amount of attention from the mainstream media and political candidates.

New Home Construction: Housing starts rose modestly and permits for new construction weakened once again indicating that there is little life in the nation's housing market where activity remains at historically low levels.

Housing starts rose 0.8 percent in January to an annualized rate of 1.012 million units but remain at depressed levels, down 28 percent on a year-over-year basis.

Housing permits, a more important leading indicator for future homebuilder activity, fell 3.0 percent and are now at levels 33 percent below where they were one year ago.

Note that after peaking very early in January of 2006, the decline has now gone on for a full two years with both housing starts and permits for new construction less than half the levels at the peak.
Multi-family home construction continues to mask an even more severe decline in single-family homes, starts of single-family homes falling 5.2 percent last month while multi-family home starts (a much smaller segment) rose 22 percent.

The housing market in the Midwest showed the most strength in January as both housing starts and permits gained.

As confirmed by Monday's National Association of Homebuilders Housing Market Index that rose a single point from all-time lows of recent months, in the near term, things may not get much worse for the homebuilders, but they are probably not going to get any better either.

Philadelphia Fed Survey: The Philadelphia area manufacturing activity index fell from -20.9 in January to -24.0 in February providing more confirmation of the quickening pace of the economic slowdown that has prompted a series of interest rate cuts by the Federal Reserve. This follows last week's dramatic plunge in the New York area Empire State index from +9.1 to -11.7 and the prior week's shocking decline from 54.1 to 41.9 in the ISM Nonmanufacturing Index.

Summary: The bad news just keeps coming - the economic slowdown appears to be quickening, the housing market shows no signs of improving anytime soon, the labor market remains weak and may soon get much weaker, and prices continue to rise. This is the worst of all possible situations for policy makers.

The Week Ahead: The coming week will be highlighted by reports on existing home sales on Monday, new home sales on Wednesday, and the second of three looks at fourth quarter GDP on Thursday. Also scheduled for release are reports on producer prices and consumer confidence on Tuesday, durable goods orders on Wednesday, and consumer sentiment, the Chicago purchasing managers index, and personal income/spending on Friday.