Home Building Activity Declines; Wholesale Prices Soar

MBA (6/18/2008 ) Velz, Orawin
Total housing starts dropped by 3.3 percent in May to a seasonally adjusted annualized rate of 975,000. Single-family starts dropped 1.0 percent. This is the 14th consecutive decline in single-family homebuilding, which has now reached the lowest level since January 1991.
Multifamily starts were down 7.9 percent. Starts of 2-4 units rose 50.0 percent while starts of 5 units and over fell 10.5 percent. April housing starts were revised down to show a 2.0 percent increase from March, compared with an initial report of an 8.2 percent increase.

Total starts increased strongly in the Northeast by 61.5 percent. Starts dropped in the rest of the regions: by 25.0 percent in the Midwest; 10.3 percent in the West; and 4.4 percent in the South. Through the first five months of this year, single-family starts were 40.1 percent lower than those in the first five months of 2007. By contrast, year-to-date multifamily starts were 10.0 percent higher than those last year.

Total permits—a leading indicator of starts—fell by 1.3 percent in May. Single-family permits dropped by 4.0 percent, virtually offsetting April’s 4.5 percent increase, which was the first monthly increase in 13 months.

Another leading indicator of housing activity released on Monday showed that home builders saw no signs of improvement in the housing market in June. The National Association of Home Builders/Wells Fargo Housing Market Index—a measure of home builders’ confidence—declined in May, matching the record low reached in December 2007.

A separate report showed a decline in the nation’s output from factories, mines and utilities. Industrial production was down 0.2 percent in May, following a 0.7 percent drop in April. Manufacturing output, which accounts for about four-fifths of industrial production, was flat despite a modest rebound in auto production. Mining production edged down 0.1 percent, but utility output fell sharply by 1.8 percent.

The industrial production report showed that capacity utilization, which measures the portion of plants in use and is considered a gauge for inflationary pressures, fell to 79.4 percent, the lowest reading since September 2005. Industrial production is one of the five monthly indicators (including monthly gross domestic product) that the National Bureau of Economic Research tracks to date recessions and expansions. It has dropped 1.4 percent since peaking in January.

Finally, a report released yesterday showed that overall wholesale prices jumped in May. The Producer Price Index (PPI) rose by 1.4 percent, the biggest increase since November. Sharp increases in energy costs and food prices led the increase in overall prices.

Excluding food and energy items, the core PPI was up 0.2 percent from April and 3.0 percent from last May. The decline in the volatile prices for passenger cars and trucks pushed core prices down, reversing the increase in the previous month.

The large increase in both the headline PPI and Consumer Price Index released last week justified recent hawkish rhetoric from Fed officials. In a June 9 speech, Federal Reserve Chairman Ben Bernanke voiced concern that recent increases in energy prices have added to inflation risks; he said that the Fed will “strongly resist” letting inflation expectations get out of control. The financial markets largely expected the Fed to leave interest rates unchanged at next the Federal Open Market Committee meeting on June 24-25. However, Fed funds futures fully priced in a rate hike by September.

Given yesterday’s reports showing continued slowing housing activity and industrial production, an early rate hike appeared less likely than the odds implied by the fed funds futures. In addition, the Fed released yesterday the results from its second Term Auction Facility session for June. It showed another strong demand for funding, suggesting that financial markets are still in need of liquidity.

Long-term Treasury yields declined in response to reports of declining housing starts and industrial production. The yield on the 10-year Treasury note fell six basis points and stayed around 4.20 percent by mid-Tuesday afternoon.