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Home construction soars, consumer prices dip

Home construction rose strongly last month while falling energy costs pulled down U.S. consumer prices.
/ Source: news services

Home construction rose strongly last month, marking a recovery from a weather-induced November slowdown. U.S. housing starts climbed 10.9 percent in December, the biggest jump in more than seven years, as groundbreaking activity increased across the nation.

The Commerce Department reported housing starts rose to a seasonally adjusted annual rate of 2.004 million units in December from an upwardly revised 1.807 million pace a month earlier. That was the largest one-month gain since an 11.2 percent increase in September 1997.

For the full year, housing starts rose 5.7 percent to 1.953 million. That is the slowest rate of increase since 2.2 percent in 2001.

Low mortgage lending rates, which averaged 5.8 percent in 2004 according to Freddie Mac economists, have been supporting the housing sector despite short-term interest rate increases by the U.S. Federal Reserve.

Permits for future groundbreaking, an indicator of builder confidence, fell 0.3 percent to a 2.021 million unit pace. For 2004 as a whole, permits were up 6.8 percent to 2.018 million units.

The Commerce Department said housing starts increased 18.8 percent in the Midwest, 10.6 percent in the South, 7.9 percent in the West and 5.7 percent in the Northeast in December.

Consumer costs contained, for now
Separately, the government reported falling energy costs pulled down U.S. consumer prices last month, but core inflation inched up and housing starts surged.

“The economy continues in a recovery mode ... with a restrained increase in prices,” said Anthony Chan, senior economist at JPMorgan Fleming Asset Management.

The Consumer Price Index fell 0.1 percent in December, the first decline since July, the Labor Department said. However, excluding food and energy, consumer prices moved up a moderate 0.2 percent for the third straight month.

“Overall, inflation remains tame and, in any event, (Federal Reserve Chairman) Alan Greenspan has it on a short leash,” said Oscar Gonzalez, an economist at John Hancock Financial Services.

For the year as a whole, consumer prices advanced 3.3 percent as energy costs surged 16.6 percent, their biggest rise since an oil-induced spike in 1990.

Core prices, in contrast, advanced at a more-moderate 2.2 percent last year. Nevertheless, the core price gain was the biggest since 2001 and double its pace in 2003.

The Fed has raised overnight borrowing costs to 2.25 percent from a 1958 low of 1 percent in five small steps and analysts said officials would stay the course.

“The core rate is sneaking up there,” said Kurt Karl, U.S. chief economist at Swiss Re in New York. “The Fed will keep raising rates. There’s no doubt about that.”

Fed Governor Ben Bernanke expressed confidence in the central bank’s efforts, saying: “Inflation is likely to remain under control.”

In addition, the government reported initial claims for jobless aid plummeted by 48,000 last week, the biggest drop in more than three years. The Labor Department’s report showed just 319,000 first-time claims for state unemployment benefits were filed in the week ended January 15, far fewer than economists expected.

Analysts said the plunge in claims likely overstated the strength of the job market, but said the reports taken as a whole suggested the economy was on solid ground.