The Devil Is in the Details

The Devil Is in the Details

A hectic, roller-coaster week (yet mercifully short) on equity markets as everyone digested Bear Stearns collapse and its possible outcomes, a large interest rate cut by the Federal Reserve and piles of cash shifting away from commodities. On the data front, a handful of indicators offered a look at the manufacturing sector, with the most important being the monthly reading on industrial production. Many analysts latched onto the fact that overall industrial output sank 0.5 percent in February, but most of the decline was due to a sharp weather-related drop from utilities. Manufacturers did report a slight dip in output for the month, though auto and housing-related industries are the ones feeling the pain yet again as business equipment production increased for the fourth consecutive month.

Although the industrial production data would not lead anyone to believe manufacturers are enjoying the best of times, these data do not paint the abysmal state of affairs found in the NY Empire State Manufacturing Survey or the Philly Fed Index. Both of these indicators, and similar ones from other regions, have been deep in negative territory (indicating contracting conditions). Which side is correct? Everyone makes fun of the two-handed economist, but at this point, one has to draw information from both.

As if we didn't know things were already awful, even more bad news from residential housing markets came this week. Although total new housing starts "only" dropped 0.6 percent between January and February, conditions were not so sanguine on the single-family side. Another month, another cyclical low as starts of new single-family homes plunged nearly 7 percent to their lowest since 1991. Same story for permits. The decline in construction will almost certainly persist for several more months before homebuilders see things totally bottom out, but this is a crucial step for bloated inventories to clear the market and inch back toward equilibrium.

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