US housing starts rebound sharply in May - Wholesale prices in sharpest annual drop since 1949

US housing starts rebound sharply in May - Wholesale prices in sharpest annual drop since 1949
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: June 16 2009 14:16 | Last updated: June 16 2009 15:07
http://www.ft.com/cms/s/0/8d85eb0c-5a6a-11de-8c14-00144feabdc0.html


New US residential building surged in May after falling to a record low the previous month as cheap construction costs and enticing tax incentives lured builders to break fresh ground.

Separately on Tuesday, official figures showed that US wholesale prices notched their sharpest annual drop since 1949 in May, easing fears of inflation, and industrial output continued its string of declines.

Housing starts jumped by 17.2 per cent in May, rising to an adjusted annual rate of construction of 532,000, commerce department figures showed on Tuesday. The rise was more than economists expected and marked a sharp turnaround from April’s revised rate of 454,000, which was the lowest level in 50 years.

Many economists see the monthly rise as a mixed blessing. Some argue that renewed building activity is a sign of health in the housing market, but others contend that the overhang of housing inventory needs to be slashed for a recovery to occur.

“The inventory overhang means any recovery in building will be very muted for an extended period but at least the very worst is over,” said Ian Sheperdson, chief US economist at High Frequency Economics.

Much of the monthly increase was due to a surge in new construction for multi-family homes, which climbed by 61.7 per cent in May after plunging the month before. Single family starts gained for the third month running, rising by 7.5 per cent.

On the year, housing starts have fallen by 45.2 per cent, as builders have been wary of breaking new ground amid plunging real estate prices. During the height of the construction boom, monthly housing starts peaked at 2.27m in January 2006.

New construction activity was the greatest in the west and south, with housing starts up by 28.6 per cent and 16.8 per cent, respectively. In the midwest and northeast, housing starts grew by 9.4 per cent and 2 per cent.

Building permits, which signal future construction, were up by 4 per cent in May to 518,000. Compared with May 2008, permits are off by 47 per cent.

The strong construction data could lift the spirits of homebuilders. On Monday the National Association of Home Builders said that US home-builder confidence had slipped this month after rising mortgage rates raised concerns about the state of the fragile housing market.

Meanwhile, labour department figures on Tuesday should ease fears that government stimulus measures will lead to a sharp increase in prices. The producer price index increase of 0.2 per cent during the month was less than analysts predicted. On the year wholesale prices have plunged by 5 per cent, the biggest annual drop in 60 years.

Excluding food and energy, core wholesale prices were down by 0.1 per cent in May, falling for the first time since 2006.

“The May producer price report supports a picture of generally weak final demand for both consumer and investment goods, leading to general downward pressure on prices,” said Brian Bethune, an economist at IHS Global Insight.

Diminished consumer demand continues to dent industrial output. The Federal Reserve said on Tuesday that industrial production fell by 1.1 per cent in May, falling for the seventh consecutive month. Output is off by 13.4 per cent compared with a year ago.

Much of the May drop, which was in line with expectations, was due to shuttered auto plants resulting from the bankruptcies of General Motors and Chrysler. Manufacturing activity was down by 0.6 per cent excluding the struggling car sector.

Meanwhile, the capacity utilisation rate, a measure of the proportion of plants in use, across all industries fell from 69 per cent to 68.3 per cent, the lowest level since 1967.

“Weakness remains pervasive, albeit the declines are less severe than at the height of the ‘panic and paralysis’ phase of the downturn late last year and early this year,” said Joshua Shapiro, chief US economist at MFR.