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Housing starts rise; wholesale inflation falls

U.S. housing starts rose 5.3 percent in November, defying Wall Street expectations for a slowdown, while producer prices posted their biggest drop since July 2004, the government said Tuesday.
/ Source: Reuters

Housing starts rose 5.3 percent in November, defying Wall Street expectations for a slowdown, while producer prices posted their biggest drop since July 2004 and showed well-contained inflation outside the volatile energy and food areas, the government said Tuesday.

Economists and market participants said the prices data may ease inflation concerns and the Federal Reserve will see the continued strength in housing construction as a sign the economy is not slowing.

“Housing starts dovetail with the stronger outlook on the economy,” said John Beerling, regional foreign exchange trading desk manager at Wells Fargo in Minneapolis.

“Even though prices are a little weaker, we are looking at an economy that is probably keeping the Fed on the same pace (of interest rate increases),” he said.

The Commerce Department said November housing starts rose to a 2.123 million unit annual rate, faster than the 2.017 million unit annual rate expected by Wall Street economists, who had anticipated rising mortgage rates would cool activity. October starts were revised up to a 2.017 million unit annual pace from the originally reported 2.014 million unit rate.

Single-family housing starts rose 4.8 percent to a 1.808 million unit annual rate while groundbreaking on multifamily units jumped 7.9 percent to a pace of 315,000 units. Construction rose throughout the country, except in the South, and the West posted the fastest pace of starts in almost 27 years.

“It’s a big surprise,” said Christopher Low, chief economist at FTN Financial in New York. “There has been plenty of anecdotal evidence of regional weakness, but none of the national numbers have shown weakness.”

Permits for future construction, an indicator of builders’ confidence, shot up 2.5 percent to a 2.155 million unit pace. Economists expected permits to fall to a 2.093 million unit pace from October’s revised 2.103 million unit pace.

Low mortgage rates have supported a five-year rally in the housing market, but borrowing costs have started to climb. Mortgage finance company Freddie Mac said the 30-year fixed-rate mortgage averaged 6.30 percent in the latest week compared with 5.68 percent a year ago.

Economists say higher rates should dampen homebuyer demand and cool the market, and recent months’ housing data has shown some signs of a moderation in the sector.

But a strong economy and reconstruction following recent Gulf Coast hurricanes could keep housing activity strong through early 2006, said Global Insight Chief Economist Nariman Behravesh.

The Commerce Department cautions that month-to-month changes in the housing starts statistics may show irregular movements and that it may take four months to establish an underlying trend for permits and six months for starts.

What’s more, the market for existing homes, rather than new builds, may be more at risk of slowing, said Joel Naroff, president and chief economist of Naroff Economic Advisors.

Producer prices fell a larger-than-expected 0.7 percent last month, the biggest drop in more than two years, according to a Labor Department report.

The drop in the Producer Price Index, a gauge of prices received by farms, factories and refineries, was the largest since April 2003 and reflected a 4 percent drop in energy costs, which swamped a 0.5 percent gain in food prices, the department said.

The core PPI, which strips out those volatile costs to provide a better gauge of underlying inflation pressures, edged up just 0.1 percent.

Wall Street economists had expected overall producer prices to drop 0.5 percent, with the core index up 0.2 percent.

Like a report on consumer prices issued last week that showed the biggest decrease in prices since July 1949, the producer price data could help ease inflation concerns.