Posted Wednesday, Oct. 17, 2012, at 8:39 AM
Some really big news on residential construction (a key weak spot of the economy today) as September housing starts rose 15 percent month to month and building permits rose 11.6 percent.
The press often pays more attention to the starts than the permits, because construction is more economically significant than paperwork. I think this is backwards, since the Census Bureau can estimate permits much more precisely (it's paperwork!) and in the long term the two series track each other. Which is to say that given the huge margin of error in the starts estimate you might dismiss this as an outlier, but the permitting data has a much smaller margin of error and says something similar. In year-on-year terms, starts are 34.8 percent above their September 2011 level (+/- 18.2 percent) while permits are 45.1 percent (+/- 1.8 percent).
That's all great news for the economy. I also think it's a clear sign of the power of QE3 and the myth of "long and variable lags." The idea that monetary policy works via long and variable lags is a great bit of ass-covering for central bankers who don't want to be held responsible for outcomes. But since monetary policy primarily works through expectations, it primarily works very quickly. QE 3 was clear, forceful, and yet also relatively modest so a short-term one-off surge in investment activity (housing starts) and durable goods purchases (car sales) followed by a speedy return to the trend growth path is exactly what we should expect. To get an accelerating recovery you'd need stronger forward guidance and a clear commitment to avoid slamming the breaks even if inflation goes up to Reagan/Volcker era average of 4 percent.