Fed easing just ahead? If there were any doubts about it before, they should melt away with this latest piece of bad news from an already staggering real estate sector: 'Sharp Drop in Housing Starts Adds / To Fear of Wider Economic Impact'. Just how sharp? In fact, construction plummeted in January to the lowest level in almost a decade, according to a Wall Street Journal report published over the weekend. New homes were down 14.3% from December and 37.8% from January 2006 levels. The Journal is usually quick to add a disclaimer to such disquieting news, and so it did, reminding us that the building slowdown could conceivably reduce the inventory of unsold homes sufficiently to speed a recovery. Even so, the story's emphasis was on the potential negatives, to wit: 'The possibility of further deterioration in the sector this year remains a primary risk to economic growth ' particularly if it is accompanied by rising loan defaults or a broad tightening of credit standards.' Of course, the U.S. economy needs a tightening of credit standards about as much as a lung-cancer patient needs a year's supply of Pall Malls. Helicopter Ben evidently agrees or he would not have touched off a mini-stampede on Wall Street last week with some unwontedly dovish comments on inflation. But don't expect the Fed Chairman to elaborate on why inflation appears to be moderating, since just a tad more 'moderating' of real estate prices than we've already experienced could push the U.S. economy into the deflationary maw it has been skirting since the tech-stock crash six years ago. Psychological Blow Even if Captain Whirlybird never again uses the word 'deflation' in public, he surely understands that a credit implosion would prove far more lethal than whatever inflationary red herring he can conjure up
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