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Experts Talk Housing Starts, Inflation

What Wall Street economists and strategists had to say about key developments on June 16 compiles comments from Wall Street economists and strategists on the key economic and market topics of June 16. Michael Englund, Action Economics Today's U.S. reports revealed a May industrial production surge that was largely signaled by the solid hours-worked figures in the last job report, though with an extra kicker from a surprisingly big utility surge. We also saw a sharp undershoot in May housing starts that added color to the big boom-bust gyration in the housing data around the April home buyers' tax credit deadline. But it is hard to know just what the peaks and troughs in these figures really mean for the housing sector, so the data were more exciting than insightful. Finally, we saw a restrained PPI headline price drop with surprising core price firmness, thanks to gains in prices for tobacco and vehicles. The most interesting takeaway from recent reports could well be that May oil price declines were accompanied by gains elsewhere that are actually leaving a surprisingly resilient round of price figures for the month, despite what appeared to be a notable commodity price downdraft when May began. Peter Newland, Barclays Capital Industrial production rose 1.2 percent in May, above our (0.7 percent) and the consensus (0.9 percent) forecast. A small upward revision to March offset a small downward revision to April. The core manufacturing component rose 0.9 percent. Strength was broad-based. Output of durable goods rose 1.7 percent, with strong gains in autos (5.5 percent), machinery (2.0 percent), and computer and electronics (1.4 percent). Nondurable output was flat on the month, depressed by a 2.2 percent drop in the petroleum component. Categorized by market group, there were 1 percent-plus gains in consumer goods, business equipment, and business materials. All in all, today's report suggests continued momentum in the manufacturing recovery—growth in the second quarter is tracking at a seasonally adjusted annual rate of 8.9 percent, quarter-over-quarter, compared with 6.3 percent in the first quarter, supporting our view that GDP growth will accelerate in the second quarter relative to the first quarter. Ted Wieseman, Morgan Stanley The May Housing Starts report was somewhat weaker than expected but in line with the expected pullback in housing market activity after the expiration of the home buyers' tax credit. Overall housing starts fell 10.0 percent in May, to a 593,000 unit annual rate. The good news coming out of the tax-credit surge in activity is that even with a likely major temporary payback in new home sales in May, with the number of new homes for sale already at a 40-year low at the end of April, there is likely little further downside risk for new home construction. Beth Ann Bovino, Standard & Poor's [The] U.S. producer price index fell 0.3 percent in May, after a 0.1 percent decline in April and a smaller drop than the 0.5 percent drop expected by markets. Core PPI, excluding food and fuel, rose 0.2 percent in May, stronger than the 0.1 percent increase expected and after a 0.2 percent gain the month before. Headline PPI is up 5.3 percent over last year, [while] the core is up 1.3 percent. Energy prices fell 1.5 percent, after falling 0.8 percent the month before. Energy prices are up 17.1 percent over last year. Food prices are down 0.6 percent, largely from the 18 percent drop for fresh and dry vegetables. Both the headline and the core rates were a bit stronger than expected, [but] the inflation outlook remains relatively tame. … [The data will] likely have a small impact on markets today.

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