Housing starts tumble, core producer prices weak

[stu]

U.S. housing starts plunged to a more than three-year low in August, while falling new vehicle costs kept producer prices unexpectedly weak, government reports showed on Tuesday, bolstering views the economy is cooling.

 

The data comes one day before the Federal Reserve's policy-setting committee meets to consider interest rates, and strengthens the case that borrowing costs will remain steady through the end of the year.

 

The Commerce Department said U.S. housing starts fell 6.0 percent in August to an annual pace of 1.665 million units, the lowest since April 2003 and 19.8 percent below the July 2005 pace.

 

Economists had forecast August housing starts to decline to 1.75 million units from July's originally reported pace of 1.795 million.

 

"It's shockingly weak housing data," said Greg Anderson, senior currency strategist at ABN Amro in Chicago. "We knew the Fed was going to pause on Wednesday. It does make it much more likely that they'll stay paused thereafter if the housing sector is this weak."

 

Producer prices edged up a smaller-than-expected 0.1 percent in August and core prices posted a surprise drop of 0.4 percent, the biggest since April 2003.

 

The Labor Department said the decline in the core producer price index, which strips out volatile food and energy costs, reflected a 2.6 percent drop in auto prices and a 3.4 percent decline in the price of light trucks and SUVs.

 

The decline in core producer prices followed a 0.3 percent dip in July, marking the first back-to-back monthly declines since November and December 2002.

 

But even stripping out the automotive price declines, core producer prices would have been unchanged, it said.

 

Wall Street economists had expected the report to show both overall and core producer prices had risen 0.2 percent last month.

 

U.S. Treasury debt prices rallied on the tamer-than-expected producer prices and they later extended gains in flight-to-safety buying as the Thai army seized control of Bangkok in a coup.

 

The benchmark 10-year Treasury note rose 18/32 in price to yield 4.74 percent in late Tuesday trade versus 4.81 percent late on Monday.

 

The dollar initially fell after the data, but recovered much of its losses after news of the Thai coup, which also helped push Wall Street stocks lower on the day.

 

HypoVereinsbank senior economic adviser Roger Kubarych said the data assures a Fed pause on Wednesday, but "inflation hawks may not be silenced by the fall in the producer price index or by the continuing drop in home building."

 

Economists anticipate that falling gasoline prices will spur consumer spending, cushioning the fall in housing-related activity.

 

Indeed, retail industry reports on Tuesday showed U.S. chain store sales rose last week as cooler weather boosted sales of seasonal items. Redbook Research said sales last week were up 4.1 percent from a year ago, following an increase the week before.

 

Discount retail giant Target Corp (NYSE:TGT - news) also boosted sentiment in the sector by saying September sales would come in near the high end of its forecast.

 

HOUSING PERMITS FALL

 

Permits for future groundbreaking, an indicator of builder confidence, fell 2.3 percent to a 1.722 million-unit annual pace, the lowest in four years. Economists had expected the Commerce Department to report August permits at a 1.745 million pace.

 

U.S. single-family starts dropped 5.9 percent to a pace of 1.360 million units, the lowest since February 2003. Single family permits were down 3.5 percent to an annual pace of 1.279 million units, the lowest since December 2001.

 

Single-family permits in the Midwest were at their lowest pace since May 1993, while in the Northeast, they were the lowest since January 1996.

 

The report came a day after an industry survey showed home builder sentiment sank for the eighth straight month in September, a more than 15 year low. The closely watched National Association of Home Builders' index declined 3 points in September to 30, the lowest since February 1991, when the economy had slipped into recession.

 

Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco, said the data could point to more serious questions about the economy than the future direction of interest rates.

 

"The question is now what? What's more important -- the economy or interest rates?" he said. "Even though this is a great number for inflation and for rate (hikes) coming to the end of their cycle, we have to move on to the next concern, which is the economy."

 

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