Housing starts lowest in 17 years, prices signal stagflation

Wednesday, June 18, 2008 at 1:15am
Building starts retreated to a 975,000 annual pace. Reuters

The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated on Tuesday.

Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported.

Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

“The latest round of commodity-price pressure is adding to both inflation and weak growth,” said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York City. “It's a pretty negative cocktail for the economy and financial markets.”

The reports underscore the Fed’s dilemma as officials try to prepare investors for an interest-rate increase. Too strong a crackdown on inflation may delay an economic rebound, while waiting too long risks a price outbreak that may need even higher borrowing costs to tame.

“We should be moving sooner rather than later,” William Poole, a former president of the St. Louis Fed, said in an interview yesterday with Bloomberg Television. “I don't think you can interpret what’s happening with energy as a temporary shock.”

Treasuries rose after the figures, while the dollar was little changed.

“Industrial production is down, that’s the stag part, and prices are up, that’s the inflation part,” said Neal Soss, chief economist at Credit Suisse Holdings Inc. in New York. Compared with the 1970s, though, “it's not likely that inflation will get as out of control when wages do not respond.”

Housing starts retreated to a 975,000 annual pace. Analysts forecast a decline to 980,000. Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects.

Spending on residential projects may continue to be a drag on growth the rest of this year as builders try to work off excess inventories.

“The downtrend is still in place,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “Inventories are still very high, prices are still coming down. None of that argues for a turnaround yet.”

Starts decreased in three of four regions, led by a 25 percent drop in the Midwest. Construction fell 10 percent in the West and 4.4 percent in the South. Starts increased 62 percent in the Northeast, led by a rebound in multifamily projects.

Residential construction has subtracted from economic growth every quarter since the first three months of 2006, culminating in a 25.5 percent drop in the first quarter that was the largest since 1981.

— Bloomberg News

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