Is the Fed’s liquidity attack winning the war on deflation? This morning’s update on wholesale prices, new housing starts and new building permits offers a few reasons for answering with a tenuous “yes.” Maybe. Even if that’s true, we’re a long way from a “recovery” that’s worthy of the name. But perhaps the blood will run a little slower; perhaps it’ll stop flowing altogether. Stranger things have happened.
First let’s take a look at prices. The Producer Price Index (PPI) for February rose a modest 0.1%, the Bureau of Labor Statistics reports. That follows January’s roaring 0.8% jump. And not a moment too soon, in the wake of large back-to-back monthly declines last year in PPI from August through December. A similar run of deflation has weighed on consumer prices as well.
Is it safe to declare the deflation risk over? No, not yet, but it’s not too soon to start thinking about the light at the end of the tunnel, dim though it’s likely to be for the time being. We’ve been arguing for some time that the first priority for the economy is nipping deflation in the bud. Without that, broader progress on 1) stopping the bleeding; and 2) laying the groundwork for recovery isn’t possible.
Ultimately, returning the economy to a state of inflation (ideally in a modest dose) is within reach for a determined central bank. Printing money, after all, comes naturally the Fed and so reversing deflation is possible and even probable. Assuming the leadership pursues the goal. Cranking up the printing presses a bit more–perhaps a lot more—offers a solution. Only timing is unclear. As for minting fresh currency, there’s no question of the recent trend. M1 money supply rose by nearly 24% during the 6 months through last month, at a seasonally adjusted annual rate, the Fed advises. Suffice to say, that’s an unmistakable sign of easy money at a time when the economy’s contracting.
To its credit, the Fed has been aggressively battling the deflation risk, and we’re starting to see some of the fruits of that struggle. Particularly encouraging is the fact that core PPI (excluding food and energy) rose last month as well—up 0.2%. In fact, that’s the third straight month that core PPI has posted a monthly gain.
There’s also good news in the housing market this morning. New housing starts jumped 22% last month vs. January, the Census Bureau reports. That’s the first rise since last June. Meanwhile, new building permits climbed 3% in February, which is also the first advance since June. Since permits are a measure of future activity, it’s clear that someone out there is beginning to respond to the low interest rates and the recognition that the economy will one day (gasp!) expand, if only a little.
No one should overestimate the implications here. Although the news on prices and housing is welcome, it may yet prove to be noise in an otherwise receding economy. Given the extent of the problems near and far, prudence suggests that today’s reports are, at best, a sign of a bottoming-out process for the economy, and an early one at that. Let’s not forget that just yesterday the Fed told us that industrial production continued its decline in February. The negative momentum, despite today’s news, still has the upper hand.
The idea that growth might one day soon is still too much to fathom at this point. More likely, the correction will continue to take a toll, as consumers pay for their years of binging by jumping on the savings bandwagon. Indeed, the labor market remains weak and there’s no reason to think that job destruction has yet run its course, as we discussed earlier this month.
That leaves us to look for signs of confirmation that today’s new is more than just a dead cat bounce. We can start by looking at tomorrow’s consumer price report for February, followed by the weekly jobless claims news on Thursday.