Bloomberg News

U.S. Economy: Home Starts Jump, Consumer Prices Stabilize

October 19, 2011

(Updates with closing markets in fifth paragraph.)

Oct. 19 (Bloomberg) -- Builders began work on more U.S. homes than forecast in September and consumer prices climbed at the slowest pace in three months, supporting Federal Reserve forecasts for a pickup in growth and a moderation in inflation.

Housing starts jumped 15 percent to a 658,000 annual rate, the most since April 2010, the Commerce Department reported today in Washington. Data from the Labor Department showed the cost of living climbed 0.3 percent from August, in line with the median projection of economists surveyed by Bloomberg News.

The increase in building was led by a surge in construction of apartments and other multifamily dwellings that may continue to support the industry as the housing slump turns more Americans into renters. Less inflation gives the central bank the flexibility to take additional steps should the world’s largest economy stumble.

“The housing numbers are getting better,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose estimate for starts was the highest in the Bloomberg survey. Policy makers “have to take some heart that the inflation numbers have come off. It leaves them more leeway to do what they have to do to support economic activity.”

Stocks declined amid concern about the strength of the economy and an impasse over European bailout talks. The Standard & Poor’s 500 Index dropped 1.3 percent to 1,209.88 at 4 p.m. in New York. The S&P Supercomposite Homebuilding Index also decreased 1.3 percent.

The median forecast for housing starts in a Bloomberg survey called for a 590,000 pace. Estimates of 75 economists ranged from 560,000 to 643,000.

More Apartments

Work on multifamily homes jumped 51.3 percent in September from the prior month to an annual rate of 233,000, the most since October 2008. New construction of single-family houses increased 1.7 percent to a 425,000 rate.

“People focus on the single-family portion of the market, but the problems in single-family activity represent a boon to the multifamily area,” said Jones.

The vacancy rate for apartments dropped in the third quarter to 5.6 percent, the lowest since 2006, according to an Oct. 6 report from Reis Inc. Effective rents, or what tenants pay after landlord giveaways are included, rose on a year-over- year basis in 81 out of the 82 metropolitan areas tracked by the New York-based property-research company.

Mortgage financing for multifamily housing of five or more units rose 31 percent to $68.8 billion in 2010 from a year earlier, a separate report today from the Mortgage Bankers Association showed.

Broad-Based Gain

Total starts climbed in all four regions, led by an 18.1 percent rise in the West and a 15.7 percent increase in the South, according to the Commerce Department.

A decrease in building permits, a proxy for future construction, took some of the shine off the housing numbers. The Commerce Department’s report showed applications dropped 5 percent to a 594,000 annual rate in September, a five-month low.

The report on consumer prices said costs excluding food and fuel, the so-called core measure, rose 0.1 percent, less than forecast and the smallest gain since March. The gauge climbed 2 percent from September 2010, the same as in the 12 months ended August.

Most Fed officials at the Sept. 20-21 meeting anticipated core and headline inflation was “likely to settle, over coming quarters, at or below the levels they see as most consistent with their dual mandate,” according to minutes released on Oct. 12. Policy makers aim for long-run core inflation of about 1.7 percent to 2 percent.

Clothing, Rents

The biggest drop in clothing prices in 13 years, lower costs for used cars and trucks and the smallest increase in rents in four months led to the moderation in core prices last month, the report showd. The slowdown in rents may not persist given the drop in apartment vacancies.

Companies like clothing retailer Gap Inc. and supermarket chain Safeway Inc. have said they are limited in how much they can raise prices to recoup raw materials costs as weak job and income gains squeeze consumers.

After adjusting for inflation, hourly wages dropped 0.1 percent in September on average, and were down 1.9 percent over the past 12 months, according to the Labor Department’s figures.

“Inflation is playing out according to the Fed’s script,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “The economy is sluggish and businesses are very hesitant to pass on higher input costs to consumers. Consumers are very price sensitive right now.”

‘Tough Economy’

A jump in cotton expenses hurt Gap’s Old Navy stores that sell more clothing made of the material, yet it “chose not to raise prices commensurate with cost given the impact of the tough economy on our customers,” Chief Financial Officer Sabrina Simmons said on a conference call with analysts on Oct. 13.

Steven Burd, chairman and chief executive officer of Safeway, said inflation was “predominantly in perishable categories” and fuel, while there were “a couple of categories that actually had deflation,” or a persistent drop in prices. Shoppers at the Pleasanton, California-based company remain “very conscious” of the price tag, he said.

--With assistance from Shobhana Chandra and Chris Middleton in Washington. Editors: Carlos Torres, Vince Golle

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net: Alex Kowalski at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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