Instant View: May housing starts plunge, PPI down

NEW YORK (BestGrowthStock) – Housing starts fell 10 pct, more than an expected fall of 3.3 pct, in May to their lowest level in five months in Commerce Department data on Wednesday.

A popular homebuyer tax credit had buoyed construction activity over the past two months but expired in April.

Housing starts dropped to a seasonally adjusted annual rate of 593,000 units, the lowest level since December.

The percentage decline of 10 pct was the biggest in 14 months. April’s housing starts were revised down to show a 3.9 percent increase, which was previously reported as a 5.8 percent rise. Compared to May last year, starts were up 7.8 percent.

New building permits, which give a sense of future home construction, dropped 5.9 percent to a 574,000-unit pace in May, the lowest in a year. That followed a 10.9 percent drop in April and compared to analysts’ forecasts for a rise to 630,000 units.

In other data, the U.S. producer price index fell in May as the cost of energy plunged, buying the Federal Reserve some time to maintain its ultra-low interest rate policy.

The Labor Department on said on Wednesday its producer price index, which measures costs at the wholesale level, fell 0.3 percent last month. Compared to a year earlier, prices rose 5.3 percent overall.

But the core reading excluding food and energy climbed just 1.3 percent, slightly above forecasts but still near the lower bound of the U.S. central bank’s presumed comfort range.

ANALYSTS COMMENTS:

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR & ASSOCIATES, TORONTO:

“PPI leaves the Fed room to stay with its low interest rate policy, but I don’t think that will help the markets because when you look at (recent) economic data…the U.S. economy seems to be weaker than what consensus hoped for … retail sales and housing numbers have been weaker than hoped for … and in Europe the banking issues remain a concern.”

“So the equity market is in at trading range. Yesterday happened to be a strong day, but I wouldn’t be surprised to see some consolidation.”

“The US economy remaining relatively weaker than what consensus expected, it leaves more room for the Fed to extend its policy. The recovery is there, but its not as strong as Wall Street expected. If the US dollar weakens on the data, it might put trading in Treasuries on hold for foreign exchange reasons. We’re seeing a lot of information that the euro is stabilizing in the 1.20 area, that area offers some good support.”

MARK VITNER, SENIOR ECONOMIST, WELLS FARGO SECURITIES, CHARLOTTE, NORTH CAROLINA:

HOUSING STARTS: “It’s very hard to calculate these figures with the end of the home-buyer tax credit. The seasonal adjustment process has only magnified the effect of the tax credit. We could see another sharp decline next month.

“People had thought we would have another month of strong gains from the residual effect of the tax credit.

“With the winding down of the tax credit, we are going to see housing retreats. It’s going to be slight drag on the economy during the summer building months. Forecasters are coming to the realization that growth will be slower in the second half. It will too slow to keep the unemployment rate from rising above 10 percent.”

PPI: “It’s a little hotter-than-expected. It’s a little surprising given the decline in commodity prices. The industrial side of the economy has been running stronger than the broader economy. That’s why we are seeing the lingering effect on industrial prices. As the economy slows in the second half of the year, we are going to see these prices come down.”

KURT KARL, CHIEF US ECONOMIST, SWISS RE, NEW YORK:

“Lousy permits, lousy starts. It’s just not looking very good and I’m not surprised to see that markets are reacting negatively to the data. Still, despite the drop in May, which is usually a good month, we are still up substantially year on year. Bottom line, we are going up very slowly and in a very volatile environment.”

MICHAEL STRAUSS, CHIEF ECONOMIST, COMMONFUND, WILTON, CONNECTICUT:

“The housing numbers for the next couple of months and as well as last month, both in starts and sales, need to be taken with a grain of salt given the issues related to tax legislation. It’s going to take until probably the late summer until we get a true reading on housing activity.

“The biggest thing that is going to help to stabilize housing is going to be a turn in labor market conditions, and the household data is showing that although the payroll data is lagging the household data.

“There will be some disappointment over this, but again it’s not something to change the GDP forecast. I don’t think it’s that big an issue.”

DAN COOK, SENIOR MARKET ANALYST AT IG MARKETS IN CHICAGO:

“I’m glad I’m not in the construction industry. These numbers are not good. There’s too much inventory, and it’s going to take a while for the industry to work its way through that. It’s going to be a long time before starts begin to pick up, probably a few years.

“As for producer prices, I don’t think we have anything to worry about on inflation, but that’s only because we have so many other challenges.”

MARKET REACTION: STOCKS: U.S. stock index futures add losses after housing starts; BONDS: U.S. Treasury debt prices firmer DOLLAR: U.S. dollar falls vs yen after data to session low

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Instant View: May housing starts plunge, PPI down