Housing starts fall sharply, inflation edges up
Written on November 19, 2009
Construction of new homes in the United States hit a six month low in October, providing more evidence of the economy’s sluggish recovery, while a surge in the cost of new and used vehicles lifted consumer prices.
The data came a day after a report showed U.S. industrial output barely budged last month, suggesting the recovery stalled somewhat after a growth spurt in the third quarter.
Analysts said slow healing in the housing market, relatively benign inflation and excess slack in the economy meant the Federal Reserve would be able to honor its commitment to keep interest rates near zero for an extended period.
“It’s going to be a slow, uneven recovery. There has been a bit of a pause in the last month or so. We have a low growth situation here, but I wouldn’t say it’s big enough to return to recession,” said Nick Kalivas, vice president of financial research at MF Global in Chicago.
The Commerce Department said housing starts dropped 10.6 percent to an annual rate of 529,000 units, the lowest since April. It was the biggest decline in 10 months.
Financial markets had expected starts to rise to a 600,000 units pace and U.S. stocks fell on the surprise drop.
Separately, the Labor Department said the Consumer Price Index rose 0.3 percent last month as the cost of new vehicles rose by the most in more than 28 years. The increase in consumer prices was a touch above market expectations cash loans with bad credit.
However, widespread price pressures were absent and analysts attributed the rise in vehicle prices to the government’s now expired “cash for clunkers” program, which had depressed auto prices by offering discounts.
Given weak auto sales, it was unlikely the rise in vehicle prices would be maintained in the months ahead, they said.
U.S. government bond prices slipped on the inflation data.
Core consumer prices, which exclude food and energy costs, rose 0.2 percent last month, the same as in September. Over the past 12 months, core prices are up 1.7 percent, higher than in September but still well below the year-earlier measure.
“We continue to expect weaker inflation in 2010 as a result of the substantial amount of spare capacity in the economy,” said Anna Piretti, an economist at BNP Paribas in New York.
CONSTRUCTION ACTIVITY DROPS
Groundbreaking for single-family homes fell 6.8 percent last month to an annual rate of 476,000 units, the lowest since May. Starts for the volatile multifamily segment tumbled 34.6 percent to a 53,000 annual pace, extending September’s slide.
For a graphic on the relationship between U.S. building permits and homebuilder stock prices, please click here
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