Sharp Reduction in Construction of New Homes
Asha Bangalore
Construction of new houses declined 17.6% in March, the largest monthly decline since January 1991. Single-family starts fell 14.4% in March and that of multi-family units dropped 30.9%. Housing starts fell across all regions of the economy, with the 29.3% plunge in the Midwest taking the lead. Construction of new homes fell 3.6% in the Northeast, 18.0% in the South, and 12.7% in the West.
Permit extensions fell 4.0%, marking the second monthly decline. On a quarterly basis, housing starts rose at an annual rate of 24.1% in the first quarter vs. a 1.2% increase in the fourth quarter. These numbers and construction data suggest that residential investment expenditures are most likely to make a positive contribution to real GDP growth in the first quarter. This sudden plunge in housing starts bodes poorly for the second quarter. The surprise is in the fact that in a favorable interest rate environment we are seeing a sharp decline in construction of new homes.
Energy Prices Give Extra Lift to Wholesale Prices in March
The Producer Price Index (PPI) of Finished Goods shot up 0.7% in March, following gains of 0.3% and 0.4% in January and February, respectively. During the first quarter, the PPI of finished goods has risen at an annual rate of 5.7% after a 7.2% increase in the fourth quarter.
The March price increase reflects the 3.3% jump in the energy price index. The recent decline in energy prices points to a moderation of this price index in April. The March gain is the result of widespread gains in energy prices. The price index for residential natural gas turned up 2.3%, residential electric power index advanced 2.3% in March, and prices for home heating oil, liquefied petroleum gas, diesel fuel, kerosene, and gasoline registered higher prices in March.
The core PPI of finished goods, excluding food and energy, matched the 0.1% increase of February. The price index of consumer goods excluding food and energy edged up 0.1% taking the three month annualized increase to 4.5% vs. a 2.5% increase in the fourth quarter of 2004. Prices for light motor trucks, passenger cars, and communication and related equipment fell less in March than they did a month earlier. The price indexes for electronic computers, commercial furniture, and welding machines and equipment fell following higher prices in February. Capital equipment prices rose 0.3% in March, after falling 0.2% in the prior month. During the first 3 months of 2005, the capital equipment index rose at an annual rate of 2.8% vs. a 3.1% increase in the fourth quarter of 2004. Clearly these numbers justify the Fed's concern about the emergence of pricing power.
At the earlier stages of processing, the intermediate goods price index rose 1.0%, in March after advancing 0.7% in the prior month, and the core intermediate goods price measure increased 0.3% during March vs. a 0.5% gain in February. There appears to be a moderation of the core intermediate goods price index, implying that pipeline prices measures may be stabilizing. On a year-to-year basis, this price index rose 7.6% in March vs. a 8.3% increase in all of 2004. The price index of crude goods turned up 4.3% in March, after declining 1.6% a month earlier. (See table below)
The FOMC is nearly certain to raise the federal funds rate to 3.00% at the May 3 meeting. The June outcome is tied to the nature of incoming economic data particularly after the recent slew of economic reports - industrial production, housing starts, retail sales, consumer confidence -- which point to an economy growing at a pace that is noticeably slower than what is reported for the fourth quarter.
Asha Bangalore (agb3@ntrs.com)
29 April 2005
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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