Inflation, Hourly Earnings and Housing

Average hourly earnings rose 0.2% in September - a level hardly sufficient to spur new consumer spending. The unemployment rate also dropped to 4.6% from 4.7%. Recent reports also show a leveling off of inflation with the CPI growing only 0.2% in August, down from 0.4% in July. While all these reports are highly subject to revision, we think it means there is little chance of the Federal Reserve increasing short-term interest rates in the next few months.

Further evidence of benign inflation was the report of a drop in existing home prices of 1.7% over the last year, the first decline in eleven years. Anecdotally, we think the pain is greater than the indexes indicate. One analyst pointed out that if priced right, the homes in the best condition and the best locations will often sell close to asking price even in tough broad market environments. The homes in less desirable locations and poorer condition just don't sell - and therefore, don't contribute to the index. Past recoveries in housing covered up some of this behind the scenes pain. This time the decline may be longer and more widespread. Yesterday's Wall Street Journal reports on a Moody's survey that projects price declines for many cities, with some not expected to hit bottom until the second quarter of 2009 (Las Vegas, Fresno, Bakersfield, Saginaw, Portland OR).