WRAPUP 4-US home building plunges, industrial output surges

* New home construction lowest in five months

* Building permits reach one-year trough

* Industrial output continues to show strength

* Wholesale prices retreat on weak gasoline costs
(Updates markets to close)

By Lucia Mutikani

WASHINGTON, June 16 (BestGrowthStock) – U.S. housing starts hit a
five-month low in May as a homebuyer tax credit expired while
wholesale prices remained subdued, giving the Federal Reserve
ample room to maintain its ultra-low interest rate policy.

The weak housing market data released by the Commerce
Department on Wednesday contrasted with a separate report from
the Fed that showed a surge in industrial output, highlighting
the uneven nature of the economic recovery.

“It seems clear that the housing market hasn’t recovered
very much, except for the amount induced by policy over the
last year. That’s the main reason why GDP growth overall
remains somewhat sluggish,” said Zach Pandl, a U.S. economist
at Nomura Securities International in New York.

The housing data was the latest to suggest the recovery
from the worst recession since the 1930s appears to have lost
some momentum in May. Economists say a renewed downturn is
unlikely.

New home building fell 10 percent to an annual rate of
593,000 units, the lowest since December. A rise in mortgage
purchase applications last week after five straight declines
offered hope the post-tax credit falloff would be temporary.

In contrast to the housing weakness, industrial output
surged 1.2 percent, partly due to a spike in utility production
as rising temperatures prompted Americans to turn on air
conditioners. Still, factory output rose a solid 0.9 percent.

The dour housing starts report and a warning from FedEx
Corp (FDX.N: ) that costs related to pensions and retiree medical
costs would hit its 2011 profits initially pushed stocks on
Wall Street lower. However, key U.S. stock indices ended flat.

Prices for U.S. government debt rose, while fresh worries
about Spain’s credit and banking system lifted the dollar from
a two-week low versus the euro.

While the manufacturing recovery appeared on track, there
were few signs of price pressures at the production level.

The producer price index, a gauge of prices received by
farms, factories and refineries, fell 0.3 percent last month as
gasoline costs tumbled, the Labor Department said.

Core producer prices, which exclude food and energy costs,
rose only 0.2 percent for a second straight month.

Other data have shown private hiring slowed sharply in May
and retail sales fell. However, employers increased working
hours and sales at some retailers held up.

ECONOMIC SLACK LESSENS

The steady factory recovery and surge in utility output
pushed industries to employ 74.7 percent of their productive
capacity last month, the Fed’s report showed.

While that measure of economic slack was up 1 percentage
point from April and at its highest level since October 2008,
it was still 5.9 points below its average from 1972 to 2009,
suggesting inflationary bottlenecks were far from building.

The benign inflation picture and worries the sovereign debt
crisis in Europe could shave a bit off U.S. growth, should
allow the Fed to renew its commitment to low interest rates at
a meeting next week.

Most economists do not expect the U.S. central bank to
raise overnight interest rates from their current level near
zero until some time next year.

“The Fed has historically not tightened before capacity
utilization is at or near 78 (percent) and usually nearer to
80,” said Alan Ruskin, head of currency strategy at RBS in
Stamford, Connecticut. “Even with manufacturing leading the
recovery, this indicator is some way away from flashing red to
the Fed that they must tighten.”

While the economy has grown for three straight quarters, it
has lacked vigor. Anxiety over the recovery pace has eroded
President Barack Obama’s popularity and could cost the
Democratic Party dearly in November mid-term elections.

The fall in housing starts in May was the biggest in 14
months and well below the 650,000 units expected by analysts.

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

Starts on single-family homes fell 17.2 percent to a
468,000 unit rate, with permits down 9.9 percent to a 438,000
unit pace. Both were the lowest in a year.

“We think that rising employment will lead to a gradual
improvement in housing activity over the second half of the
year,” said Nigel Gault, chief U.S. Economist at IHS Global
Insight in Lexington, Massachusetts. “But the second successive
monthly decline in single-family housing permits indicates the
payback (from the tax credit) has further to run first.”

Analysts said while mortgage rates and home prices were
low, an oversupply of houses on the market was weighing on
construction.

However, demand for home loans bounced back from 13-year
lows last week, with mortgage purchase applications rising 7.3
percent, the Mortgage Bankers Association said.[ID:nNLLFHE66F]
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U.S. mortgages: http://link.reuters.com/xuw22m
Housing starts, permits: http://link.reuters.com/hac42m
Inflation in the Americas: http://link.reuters.com/ryf42m
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Investing Basics

(Additional reporting by Pedro Nicolaci da Costa and Emily
Kaiser in Washington; Editing by Andrew Hay and Chizu
Nomiyama)

WRAPUP 4-US home building plunges, industrial output surges