U.S. Economy: Producer Prices, Housing Starts Climb (Update1)
By Shobhana Chandra and Robert Willis
Dec. 19 (Bloomberg) -- Prices paid to U.S. producers jumped by the most since 1974 and a year-long housing slump showed further signs of bottoming out, strengthening the Federal Reserve's case for keeping interest rates steady.
The producer price index climbed 2 percent in November from a month earlier, led by higher costs of energy and light trucks, the Labor Department said today in Washington. Housing starts rose at an annual rate of 1.588 million last month, more than forecast and 6.7 percent higher than in October, the Commerce Department said. Building permits declined.
The reports signal that two quarters of slowing growth haven't been enough to defeat inflation and that the housing slump may be less of a drag on growth in coming months. That may make Fed policy makers, who have already been emphasizing the risks of inflation, even more reluctant to reduce rates.
``The Fed's stance is a correct one,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``They're right to ignore the background noise, and keep rates steady.''
In the prior month, producer prices fell 1.6 percent. Excluding food and energy, the so-called core rate rose 1.3 percent in November, the most since July 1980, after falling 0.9 percent.
Yields on Treasury notes rose in the minutes after the figures were released at 8:30 a.m., New York time, before retreating to be little changed. The benchmark 10-year note was at 4.58 percent at 12:06 p.m.
So far this year, producer prices are rising at a 0.3 percent annual rate, compared with 5.3 percent in the same 11 months of 2005. Core prices are rising at a 2 percent rate, after a 1.6 percent pace during the same period last year.
Housing Downturn
Recent data suggest the most severe housing slowdown since 1990 may be nearing a bottom, as mortgage rates have fallen below last year's levels, making homes affordable for more people. Wet weather in October may have delayed some starts until November, helping to boost last month's figures, economists said. Still, near-record inventories of unsold homes will keep a lid on home construction well into 2007.
``Mild weather plus more attractive pricing on the part of home builders probably helped lead to this bounce in starts,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. The decline in permits shows builders ``are continuing to plan for less construction.''
Economists surveyed by Bloomberg News forecast starts to rise to a 1.54 million unit pace from an originally reported 1.486 million pace the prior month, according to the median of estimates. November starts were down 26 percent from a year earlier.
Building Permits
Permits were expected to fall to 1.54 million from the originally reported 1.553 million, according to the forecasts. They declined 3 percent to a 1.506 million pace, the lowest since December 1997.
Downturns in housing and manufacturing are slowing economic growth, spurring calls for the Fed to cut interest rates after two years of increases through June. Policy makers kept the overnight lending rate at 5.25 percent last week.
The yield on the benchmark 10-year Treasury note has plunged from 5.245 percent on June 28, the day before the Fed's last rate increase, to 4.59 percent. Traders expect the Fed to cut its benchmark rate at or before the May 9 meeting, based on the price of interest-rate futures on the Chicago Board of Trade.
Bill Gross, chief investment officer at Pacific Investment Management Co., the world's biggest bond fund, told CNBC on Dec. 12 that he expects the Fed to begin lowering its benchmark rate by the middle of next year, and expects a rate of 4.5 percent by the end of 2007. Gross wasn't immediately available for comment.
Energy Prices Rebound
Energy prices jumped 6.1 percent last month, the most since February 2003, after decreasing 5 percent in October. The price of gasoline surged 17.9 percent, the biggest rise since June 2000, and natural gas costs rose 5.9 percent.
The government asks survey participants to report prices for the Tuesday of the week that includes the 13th. On that basis, natural gas futures prices on the New York Mercantile Exchange rose to $7.98 per million British thermal units last month, from $6.47 in October.
Food prices rose 0.1 percent after a 0.8 percent decline in October, the Labor Department said.
Costs of intermediate goods, those used in earlier stages of production, rose 0.7 percent last month. They were up 2.4 percent in the 12 months ended in November. Prices for raw materials, or so-called crude goods, jumped 15.7 percent and were down 8.5 percent since November 2005.
Intermediate Goods
Excluding food and energy, intermediate goods prices fell 0.3 percent after no change in October. Compared with a year ago, core intermediate goods costs rose 5.1 percent.
Core crude goods prices rose 0.5 percent from a month earlier.
Prices for passenger cars increased 2.2 percent after dropping 2.3 percent in October. Costs of light trucks surged a record 13.7 percent after falling a record 9.7 percent.
Prices for capital equipment rose 1.4 percent in November after a 0.9 percent decrease the month before. Computer prices rose 0.3 percent.
The producer price index is one of three monthly inflation gauges reported by the Labor Department.
The department said last week that its consumer price index held steady in November after a 0.5 percent drop in October. Core prices that exclude food and energy were also unchanged, the first month without a gain since June 2005.
Price Pressures
Price pressures are increasing in some industries even as the growth slows.
AK Steel Corp., the third-biggest U.S. steelmaker, said last month it will add a $135 per ton surcharge to invoices for electrical-steel products shipped in December. Middletown, Ohio- based AK Steel said its surcharges are based ``on reported prices for raw materials and energy used'' to make products, with October purchase costs used to determine the December surcharges.
Other companies are having trouble boosting prices.
Steel Dynamics Inc., the third-largest U.S. steelmaker, last week cut its fourth-quarter profit forecast after a greater-than-expected drop in selling prices for flat-rolled steel and fewer orders. Lower prices also led Nucor Corp., the second-biggest U.S. steelmaker, to reduce its profit forecast the same week.
To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net ; Bob Willis in Washington bwillis@bloomberg.net
Last Updated: December 19, 2006 12:19 EST |
