Oil is again nudging US$60 per barrel and US rate hikes are again on the radar. Worriers about the US (and therefore the global) economy over the past year have worried especially about the slump in the US housing market. There has been the mother of booms in the US, and also UK and Australia, and rate hikes have bitten at least to some extent.

The US Fed has held the US cash rate at 5.25% since August last year. The stated reason was that the economy had begun showing signs of cooling, specifically due to the “gradual cooling of the housing market”. Since that time, analysts, economists and investors have dedicated acres of print to the “housing slump”.

Indeed, as this graph shows, the doomsters have a point – the amount of “Housing Starts” showed a definite tapering off in late 2006 after one of the longest and strongest booms on record. Note especially the highly cyclical nature of this series – in economics, like ballistics, what goes up usually comes down.

One of Henry’s favourite investment gurus, Anthony Baring, was among the many who have been worrying about the impact of the housing downturn:

To us, one of the prime US risks has been and remains housing related. While housing market cycles are usually dictated by job security, personal income growth and interest rates, there has been a substantial asset switch in the US. Real estate now makes up 42% of the overall household asset base excluding pensions and life insurance reserves – back in 2000 it was below 30%.

More will be revealed when the next set of housing starts data is released this Friday. In the FOMC statement accompanying the latest interest rate decision, it stated that “some tentative signs of stabilisation have appeared in the housing market.”

This month’s Raff Report also focuses on the good ol’ US of A and, contrary to the doomsters, Raff sees the current housing slowdown as an anomaly when compared with the strength of the rest of the economy.

“If the interpretation of the data is correct, the world’s largest economy is set for a recovery in the durable goods sector and that is good news for metals, but bad for gold when US rates rise as they surely will.”

The US housing starts data to be released this week will be only another short-term indicator. But since the long term is only a succession of short terms, we shall report its result and add it to all the other indicators that make up our long-term picture.

Read more at Henry Thornton.

Peter Fray

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