"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Wednesday, November 17, 2010

CPI and Housing Starts

What is on the agenda for the day? CPI and Housing Starts, that's what's on the agenda.

The CPI, also known as the Consumer Price Index, represents... well, not to put too fine a point on it, it represents inflation. The CPI looks at how much buying power your salary has lost the previous month. Ahem. I mean, it looks at how much the cost of a fixed basket of goods and services that consumers would purchase has increased. While the "core" CPI looks at exactly the same thing, except that it cuts out volatile components of the basket like food and energy. Because, after all, how important are food, electricity, and gas to consumers? Really?

Anyway, CPI increased by a meager 0.1% in September while core CPI did not change in the slightest. The analysts aren't so optimistic for October; they're calling for a 0.4% increase, with a 0.1% increase in the core.

Why should you care? Well, it all gets back to that "two-thirds of GDP is driven by consumer spending" concept. If prices go up, consumers are able to buy less, and overall consumption goes down. This has a negative effect on GDP, particularly from a Keynesian economic perspective: spending good; savings bad [1].

Housing Starts are, well, exactly what they sound like. They're the number of residential construction projects that have broken ground during the month. September saw 610,000 starts. The analysts are expecting only 590,000 starts for October; that makes a certain amount of sense to me, given that it's October we're talking about here. That doesn't strike me as prime building season in the temperate climate most of the United States calls home.

But why should you - indeed, anyone - care? Three words: trickle down economics, baby. It's called voodoo economics when a President proposes it through tax cuts, but it's solid economics when it comes to home construction. Building a new house needs lumber, and copper pipe, and drywall, and paint, and shingles, and insulated copper wire, and a thousand other things. Then there's carpet, hardwood flooring, tiles, and appliances. Then, when the house is sold there's new furniture, lawn care products, insurance, and all the various and sundry things that transform a house into a money pit... I mean into a rapidly devaluing investment. Damnit, I mean into a home.

[1] Grossly simplified, actually, but correct in broad strokes.

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