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The Economy: Housing Hope, Consumer Gloom

While housing starts unexpectedly rose in April, consumer sentiment dropped to its lowest level in 28 years in May

By BusinessWeek, Standard & Poor's, and Action Economics staff

The housing market may be loosening up a bit, but the consumer mood is the darkest it has been since the Carter Administration, according to two economic reports released May 16.

U.S. housing starts rebounded 8.2%, to a 1.032 million-unit annual pace in April, from a revised 0.954 million rate in March (from 0.947 million previously). February's 1.075 million pace was revised up to 1.107 million. The consensus forecast of economists was for a drop to 940,000. Housing starts are still down 30.6% from a year ago.

The April increase was entirely in multifamily starts (up 40.5%). Single-family starts dropped 1.7%, to 692,000. The increase was concentrated in the Midwest (up 24.4%) and the West (up 18.5%). Starts were down 12.7% in the East and up 3.6% in the South. Building permits rose 4.9%, to 978,000.

Housing Will Continue to Stunt Growth

Starts continue to do better than expected, which is good news for U.S. economic growth, notes S&P Economics. "We do not think the [housing] problem is over, however, and still expect declines through the summer," wrote S&P economist Beth Ann Bovino in a May 16 note.

John Ryding, chief U.S. economist at Bear Stearns (BSC), advised against reading too much into the rise in permits and said in an e-mail note that the decline in housing starts over the last three months shows housing will continue to be a significant drag on growth in the second quarter.

For the other April housing reports, Action Economics continues to expect declines of 0.6% for existing home sales to a 4.900 million-unit annual rate, a 1.1% drop in new home sales to a 0.520 million pace, and a 0.9% drop in construction spending.

Inflation Indexes Take Off

But any fledgling optimism regarding the housing market was tempered with a bleak preliminary reading in the Reuters/University of Michigan report on consumer sentiment for May. The headline index fell to 59.5—its weakest level since June, 1980—from 62.6 in April. The current economic conditions index fell to 71.7, from 77.0 previously. The economic outlook index fell to 51.7, from 53.3.

The inflation indexes, which measure consumers' expectations of future prices, really took off, notes Action Economics, with the one-year median inflation rate rising to 5.2%, from 4.8% in April (it was 3.4% in January). The five- to 10-year inflation index edged up to 3.3% from April's 3.2% (it was 3.0% in January).

The government's stimulus plan failed to bolster the sentiment readings, notes Action Economics, and raised the risk that "consumers will fail to spend their way out of recession."

Stocks fell in mid-morning trading May 16 after the gloomy sentiment report, while the dollar slipped slightly. Treasury yields reversed lower after traders saw the inflation component of the report.

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