Home construction rebounded in July and the cost of living rose at a slower pace, showing a strengthening U.S. economy has yet to generate a sustained pickup in inflation.
A 15.7 percent jump took housing starts to a 1.09 million annualized rate, the strongest since November, and halted a two-month slide, the Commerce Department said in Washington. The consumer price index increased 0.1 percent after rising 0.3 percent in June, the Labor Department also reported.
An improving job market and cheaper borrowing costs are helping revive residential real estate, helping boost sales at companies such as Home Depot Inc. (HD) As inflation continues to run below the Federal Reserve’s target, it gives the central bank room to keep interest rates low well after the projected end of its bond-buying program in October.
“The recovery remains on track, but we’re not moving forward at a burning-hot pace,” said Laura Rosner, a U.S. economist at BNP Paribas in New York, who accurately forecast the increase in consumer prices. “The Fed has the luxury really to keep policy very accommodative and keep fostering economic growth and labor market improvement.”
“There’s no hurry to raise rates at this point,” said Rosner.
The improving economy and low inflation helped stocks advance. The Standard & Poor’s 500 Index climbed 0.5 percent to 1,981.6 at the close in New York. The S&P Supercomposite Homebuilding Sub Index advanced 2.6 percent.
Price pressures also abated overseas. U.K. inflation cooled more than economists forecast in July, giving the Bank of England leeway to keep its key interest rate at a record low. The rate of consumer-price growth fell to 1.6 percent from 1.9 percent in June, the Office for National Statistics said today in London.
The pickup in housing starts in the U.S. exceeded all estimates in a Bloomberg survey of 75 economists. The median projection called for 965,000, within a range of 898,000 to 1.03 million. The Commerce Department also revised June’s reading up to a 945,000 pace from a previously reported 893,000.
The report also indicated the building industry will probably consolidate gains in coming months as permits for future projects advanced 8.1 percent to a 1.05 million pace, about in line with the current level of starts. The gain reflected the most applications for single-family dwellings since November.
Starts of single-family properties rose 8.3 percent to a 656,000 rate in July, the fastest this year, the Commerce Department said. Construction of multifamily projects such as condominiums and apartments rose 28.9 percent to an annual rate of 437,000, the most since January 2006 and the second-strongest since February 2000.
Three of four regions showed an increase in groundbreaking last month, led by a 44 percent jump in the Northeast to the highest level since July 2008. Starts rebounded 29 percent in the South and climbed 18.6 percent in the West.
Home Depot is benefiting from improving demand. Second-quarter profit at the largest U.S. home-improvement retailer topped analysts’ estimates and the Atlanta-based company today raised its forecast for the year, sending its shares up 5.6 percent at the close.
Part of the reason for the optimism is that homeowners are buying more appliances, a category that Home Depot has been expanding. U.S. shipments of major home appliances rose 7.1 percent in the 12 months that ended in July, according to the Association of Home Appliance Manufacturers.
Today’s Labor Department consumer-price report showed a 0.4 percent increase in food costs in July, reflecting broad-based increases. The gain was almost offset by a 0.3 percent decrease in fuel expenses as gasoline prices retreated.
Declines in energy prices have continued this month, giving households some relief. The average cost of a gallon of regular gasoline was $3.45 as of Aug. 18, down from an average $3.59 in July, according to AAA, the biggest U.S. auto club.
Consumer prices excluding food and fuel, known as the core rate, also climbed 0.1 percent in July for a second month, the Labor Department reported.
The core rate reflected increases in rents, new cars and medical care, which were almost completely offset by lower costs for airline fares, used cars, tobacco, recreation and household furnishings. The price of plane tickets dropped 5.9 percent, the most since December 1995, after rising 10.9 percent over the previous five months.
The muted increase in total prices was still enough to erode wage gains. Hourly earnings were unchanged on average last month after adjusting for inflation, another Labor Department report showed today. They were also little changed over the past 12 months.
The housing industry’s recovery has been challenged by the slow wage growth and tight credit, which have put homeownership out of reach for some Americans.
Nonetheless, today’s figures corroborate a report yesterday showing builder confidence rose in August to the highest level in seven months.
Weather dealt a setback to builders at the beginning of the year as snow blanketed construction sites in parts of the country and bitter cold kept some would-be buyers at home. Homebuilding bounced back in the second quarter, climbing at a 7.5 percent annualized rate after a 5.3 percent slump in the first three months of the year, data from the Commerce Department showed on July 30.
More hiring and cheap borrowing costs are helping some Americans take the plunge. The economy added more than 200,000 jobs for a sixth straight month in July, the longest such stretch since 1997, according to Labor Department figures.
A decline in borrowing costs this year has also helped. The average 30-year, fixed-rate mortgage was 4.12 percent in the week ended Aug. 14, down from 4.53 percent at the start of January, according to data from Freddie Mac in McLean, Virginia.
While the market recovers, demand is outpacing construction. The U.S. requires between 1.6 million and 1.9 million new units a year just to accommodate population growth and household formation, according to the Harvard Joint Center for Housing.
New orders at the Ryland Group Inc. climbed 1.7 percent, to 2,228 homes, in the three months ended June 30. It was the best quarter in seven years for the Westlake Village, California-based company and President and Chief Executive Officer Larry Nicholson said he is optimistic about the outlook.
“We remain confident about the future of housing,” Nicholson said on a July 31 earnings call. “We see the markets continue to move forward. We have good traffic. We’re making sales. We’re making margin. We’re pretty upbeat for what we see for the rest of the year.”