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Home Construction in U.S. Slumps, Producer Prices Rise in Recovery Hurdle

Housing starts in the U.S. plunged to the lowest level in almost a year in February and wholesale prices rose more than forecast, hurdles for a recovery that the Federal Reserve said yesterday is on a “firmer footing.”

Home construction dropped 23 percent to a 479,000 annual rate, while building permits slumped last month to a record low, Commerce Department figures showed today in Washington. The producer-price index jumped 1.6 percent in February, the most since June 2009, the Labor Department said. The gain exceeded the highest forecast in a Bloomberg News survey.

Builders such as Ryland Group Inc. (RYL) are battling foreclosures, falling home prices and tepid job growth, reasons why the Fed yesterday said the industry that precipitated the last recession is still “depressed.” At the same time, wholesale prices soared because of a surge in food and energy costs that threatens to restrain business and consumer spending.

“Housing continues to collapse under its own weight,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston. Higher fuel and food prices are “acting as a tax on consumption that’s restraining spending on goods and services.”

Morgan Stanley and RBS Securities Inc. were among firms that reduced first-quarter growth estimates after the Commerce Department’s housing starts figures. Economists at Morgan Stanley trimmed their forecast to 2.8 percent from 2.9 percent, while RBS Securities reduced its projection to 2.6 percent from 2.8 percent.

‘Very Cautious’

“Builders are very cautious about building new homes when there’s a lot of inventory that is or could be coming onto the market with respect to foreclosures,” Michelle Girard, senior economist at RBS Securities in Stamford, Connecticut, said in an interview. Girard said in a research note that “coming into today we were looking for residential investment to be up modestly in the first quarter, but now expect it to be closer to flat.”

Stocks fell, sending the Standard & Poor’s 500 Index to the lowest level since December amid concern Japan’s nuclear crisis will worsen. The S&P 500 slumped 2 percent to 1,256.88 at the 4 p.m. close in New York. Treasuries rose, pushing down the yield on the benchmark 10-year note to 3.21 percent from 3.30 percent late yesterday. It dropped as low as 3.14 percent, the least since Dec. 8.

Housing starts were forecast to fall to a 566,000 annual rate, according to the Bloomberg survey of 74 economists whose estimates ranged from 537,000 to 638,000.

Record-Low Permits

“Most of North America was covered in snow in February and that probably had a depressing effect on housing,” said David Resler, chief economist at Nomura Securities International Inc. in New York. Still, “the decline in permits was an indication of fundamental weakness.”

Building permits dropped 8.2 percent to an all-time low annual rate of 517,000 units. They declined by 28 percent in the Northeast to the lowest on record and by 14 percent to the lowest ever in the West.

Construction of single-family houses decreased 12 percent to a 375,000 rate in February, the slowest since March 2009, from the prior month. Work on multifamily homes, such as townhouses and apartments, slumped 46 percent.

Starts fell in all four regions, led by a 49 percent drop in the Midwest to a record low. Starts declined 38 percent in the Northeast, 28 percent in the West and 6.3 percent in the South.

Fed officials after their policy meeting yesterday said in a statement that while housing remains weak, “the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually.”

‘Biggest Impediment’

For housing, employment “is the most important part today or biggest impediment,” said Larry T. Nicholson, chief executive officer of Ryland Group, a Calabasas, California-based homebuilder catering to first-time buyers.

Whether potential buyers “have a job and they’re going to keep their job or whether their hopes of employment are out there is still the biggest challenge for us today,” Nicholson said at an investor conference March 8 in Orlando, Florida.

The Fed also said “longer-term inflation expectations have remained stable” even with gains in crude oil prices that are causing more pain for Americans at the gas pump.

The Labor Department said its producer-price index climbed 1.6 percent, the most since June 2009, reflecting gains in fuel and the biggest jump in food costs since 1974. Core producer prices, which exclude food and fuel, rose 0.2 percent, less than half the 0.5 percent gain in January.

Raw Materials

The cost of raw materials has risen further as expanding economies in Asia and Latin America lift demand, and crude oil has been pushed up by turmoil in the Middle East. Even so, firms have limited scope to raise prices to shield profits, allowing the Fed yesterday to maintain monetary easing to spur growth while citing “subdued” underlying inflation.

The cost of food increased 3.9 percent, the most since November 1974, while energy prices rose 3.3 percent led by a 15 percent jump in home heating oil.

“As the Fed is saying, most of the economy is on a firmer footing and is recovering, but the housing market remains depressed,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The inflation picture, though, is a concern for the Fed largely because rising fuel and food costs are draining purchasing power from households, and as a result pose a downside risk to the economy.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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