US housing starts hit 17-year low while consumer prices stay mild

Inflation data seen giving Fed scope to cut interest rates

The number of US housing projects started last month fell to the lowest in 17 years, while consumer prices moved up a bit less than expected, leaving the Federal Reserve some room to lower interest rates to ward off a housing-led slowdown.

While the slide in the housing sector continued, industrial production unexpectedly rebounded as utilities raised output due to colder weather, making up for weak manufacturing growth.

The Commerce Department yesterday said that housing starts dropped 11.9 per cent in March to an annual rate of 947,000 units, the slowest pace since March 1991 and well below the 1.02 million expected by economists.

'These housing starts suggest that the pace of decline is intensifying, which is the last thing the US economy needs right now,' said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.

Building permits fell 5.8 per cent to their lowest since April 1991, when the economy was in recession.

Separately, the Labor Department said consumer prices rose 0.3 per cent last month, slightly less than expected, after a flat reading in February. Stripping out food and energy, core prices, which also held steady in February, moved up an even milder 0.2 per cent, restrained by a big drop in the cost of clothing.

US stock prices shot higher and US government bond prices moved lower as investors saw the price data as leaving more room for the US central bank to keep cutting interest rates to try to spur a slowing economy. The US dollar lost ground on the prospect of more rate cuts, with the euro reaching a record high.

The Fed has lowered benchmark borrowing costs by three percentage points since mid-September, trying to ward off spreading weakness from the deep housing downturn and a related drying up of credit.

The report on consumer prices showed rising energy prices continuing to exert upward pressure on overall inflation.

Energy prices shot up 1.9 per cent in March. The cost of petrol, which hit record highs last month, rose 1.3 per cent.

While financial markets initially greeted the consumer price data as providing greater scope for the Fed to lower interest rates, not everyone agreed. Over the past year, consumer prices have risen a sharp 4 per cent on the back of surging energy costs.

'In spite of a benign core reading, the overall increase will persuade the Fed to be less aggressive in easing rates,' said Richard DeKaser, chief economist at National City Corp in Cleveland.

Separately, the Fed said output at the nation's mines, factories and utilities rose 0.3 per cent in March after a downwardly revised drop of 0.7 per cent in February. Wall Street economists had forecast a 0.1 per cent decline after February's previously reported 0.5 per cent fall.

Utility output climbed 1.9 per cent after a 3.6 per cent drop in February, while manufacturing production rose 0.1 per cent after a 0.5 per cent fall.

'Factory output was held down by a large decline in the output of motor vehicles and parts. A shortage of motor vehicle parts that resulted from a strike at a parts manufacturer idled a number of motor vehicle assembly plants,' the Fed said in the report, referring to the seven-week-old walkout at American Axle & Manufacturing Holdings that lay behind a 5.4 per cent fall in motor vehicle output. Excluding motor vehicles, factory production rose 0.4 per cent.

The capacity utilisation rate, a gauge of how busy the nation's industry was, edged higher to 80.5 per cent from 80.3 per cent, still well below levels that would be considered inflationary. -- Reuters

Source : Business Times - 17 Apr 2008