NEW YORK (
) -- Today's dismal housing report suggests there's little evidence to support the dramatic rise of stocks in recent months.
The Labor Department said housing starts fell 11% to 529,000 units in October, which means builders broke ground on the fewest new homes since April. Analysts polled by
had expected 600,000 new units. Permits for new construction fell 4% to 552,000 units.
Bloomberg Americas Home Builders Index
, which tracks 20 companies, has climbed 56% this year, doubling the 26% advance of the
S&P 500 Index
. While some may be feeling more secure now that their 401(k) balances have risen, the economy is still struggling and investors should be careful before becoming overly bullish.
Fewer-than-anticipated housing starts and building permits show little confidence in the economy and create uncertainty about the direction of the property market after housing tax credits expire. These incentives expire at the end of April, and builders have said they fear demand will drop after they're no longer available. Falling building permits suggests this uncertainty could stretch into 2010.
Weak housing numbers may be an ancillary effect of unemployment reaching above 10% earlier this month. As the employment picture continues to dim, the possibility of an uptick in housing demand remains remote.
On the bright side, inflation seems to be under control after the Consumer Price Index rose 0.3% in October. Economists had expected a 0.2% increase.
The Consumer Price Index will be critical going forward. One of the side effects of the government pumping massive sums of money into the economy is an expansion in the money supply, which can lead to inflation. When the economy improves, inflation could be rampant if the Federal Reserve doesn't boost its interest rate or reel the excess supply back in. Both courses of action are tricky and could damage the recovery if done too aggressively or not aggressively enough.
While inflation is the long-term fear, some companies are fighting deflationary conditions, which can be far more damaging.
recently said it was experiencing "ongoing deflation" in its businesses. This signal from the world's largest retailer raises more concerns about the near-term health of the economy, making inflationary fears an afterthought.
-- Reported by David MacDougall in Boston.
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Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.