U.S. Economy: Housing Starts Climb, Industrial Output Sinks

Housing starts jumped more than forecast in May while industrial production tumbled, offering a picture of an American economy still struggling to emerge from the deepest recession in half a century.

Builders broke ground on 532,000 dwellings at an annual rate, with single-family starts posting a third straight gain, Commerce Department figures showed today in Washington. Output at factories, mines and utilities dropped 1.1 percent, and the share of industrial capacity in use slid to a record low, the Federal Reserve said.

“The paralysis and the panic phase of this downturn is behind us” and “the rate of decline has slowed, but there are lots of problems that have yet to be cleaned up,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.

Homebuilders’ shares advanced for the first time in five days after the housing report reinforced evidence that the industry’s decline, now in its fourth year, will end in the second half. At the same time, rising unemployment may prevent any boom after the bust, and stunt a manufacturing recovery.

Wholesale prices dropped 5 percent in the 12 months to May, the biggest slump in half a century, the Labor Department also reported today. On a monthly basis, the producer-price index rose 0.2 percent, less than forecast.

Steel Industry

The recession, which began in December 2007 and spread across the globe, has pulled down industrial commodity prices, with steel costs dropping more than half from July to last month. Nucor Corp., the second-largest U.S. steel producer by sales, said in May it was running its mills at 45 percent capacity.

Nucor, based in Charlotte, North Carolina, today forecast a second-quarter loss that’s narrower than analysts’ estimates and said it has seen orders increase. “Order entry has improved in recent weeks,” Nucor Chief Executive Officer Dan DiMicco said.

The Standard & Poor’s 500 Stock Index climbed after today’s figures, rising 0.3 percent to 926.65 as of 10:46 a.m. in New York. The S&P homebuilder supercomposite index was up 3 percent.

Yields on benchmark 10-year notes rose for the first time in four days, to 3.75 percent, from 3.71 percent late yesterday.

Exceeds Forecast

Housing starts were projected to rise to a 485,000 annual pace, according to the median forecast of 71 economists surveyed by Bloomberg News. Estimates ranged from 450,000 to 600,000.

Permits rose 4 percent to a 518,000 pace from a 498,000 rate the previous month. They were forecast to increase to a 508,000 annual rate.

Construction of single-family homes rose 7.5 percent to a 401,000 rate. Work on multifamily homes, such as townhouses and apartment buildings, jumped 62 percent to an annual rate of 131,000.

The increase in starts was led by a 29 percent jump in the West and a 17 percent increase in the South. They rose 11 percent in the Midwest and 2 percent in the Northeast.

Toll Brothers Inc., the largest luxury homebuilder, and Hovnanian Enterprises Inc., New Jersey’s biggest builder, this month reported quarterly losses as revenue plunged. Still, the companies narrowed their losses from a year earlier.

Slump Abating

“Although we are still at very low levels we are seeing signs it looks like that maybe we are at a bottom,” Joel Rassman, Toll Brothers’ chief financial officer, said in an interview on Bloomberg Television yesterday. “The programs that have been put in are maybe working for the economy.” Rassman said Toll has seen increases in deposits, buyer traffic and sales agreements over the last two months.

The Fed’s production report showed manufacturing, which accounts for about fourth-fifths of the total, dropped 1 percent after a 0.6 percent decrease in April. Factory production was down 15 percent since May 2008, the biggest 12-month drop since 1946.

The fallout from bankruptcies at Chrysler LLC and General Motors Corp. may ripple beyond auto-related industries in coming months. Motor vehicle and parts production slumped 7.9 percent in May after falling 1.2 percent the prior month, today’s report showed.

Auto Shutdowns

Chrysler shut all its plants on May 1 to clear as many unsold vehicles as possible from dealer lots while it restructures. The sale of most of Chrysler’s assets to a group led by Italian automaker Fiat SpA was completed last week.

GM, the biggest U.S. automaker, said June 1 it is stopping work at 14 plants as it restructures.

Excluding automobiles, factory output dropped 0.6 percent for a second month. In addition to cars, other consumer goods retreating last month included home electronics, clothing and furniture and appliances.

The amount of industrial capacity in use dropped to 68.3 percent, the lowest level since records began in 1967.

One positive aspect of spare capacity is that it will help control inflation should raw-material costs keep rising, economists say.

Producer prices excluding food and energy, known as the core rate, dropped 0.1 percent in May, the first decrease in more than two years, Labor’s report showed.

“The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued,” Fed Chairman Ben S. Bernanke told Congress on June 3. “We anticipate that inflation will remain low.”