New Residential Construction Down 32.1%

June 24, 2008--The housing market remains weak as evidenced by a fall in new residential construction. Higher energy and food prices caused the Producer Price Index to increase, while a drop in utility output hampered industrial production. Last, the Conference Board's Leading Indicators rose, with higher stock prices and a higher yield spread making the largest positive contributions to the index.

 

New Residential Construction
Housing starts decreased 3.3% in May to 975 thousand units, following a revised increase of 2.0% in April (originally reported as an increase of 8.2%). Permits for new housing also fell, down 1.3% during May. Compared to May 2007, housing starts are down 32.1%. The housing market remains soft, even with lower mortgage rates, as the ongoing credit crisis continues to deter potential buyers. Moreover, April's National Association of Home Builders housing market index of builder optimism fell and now matches its record low recorded in December of 2007.

 

Producer Price Index
Producer prices for finished goods surged 1.4% in May, after rising 0.2% in April. A large increase in food and energy prices again fueled higher prices for producers. Inflation appeared at all levels of production, including core intermediate goods, which are often viewed as leading indicators of consumer inflation. In May, materials used for durable and nondurable goods rose 4.5% and 3.2%, respectively. Moreover, core prices, which exclude food and energy prices, increased 0.2% for the month. If demand remains stable during the coming months, top-line inflation will likely remain stable, thus giving monetary policy makers some leeway to stimulate growth.

 

Industrial Production
Industrial production decreased 0.2% in May. Previously, in April, industrial production declined 0.7%. Utility output led the decline, as it plunged 1.8% during May. Capacity utilization also decreased and now stands at 79.4%, its lowest reading since Hurricane Katrina. Manufacturing output remained unchanged while mining actually rose 0.1% in May. With continued weakness in residential investment, auto production, and the broader economy, expect industrial production to remain weak this quarter.

 

Conference Board's Leading Indicators
The Conference Board's Index of Leading Indicators rose 0.1% in May, matching a 0.1% increase in April. Four of the 10 components made positive contributions to the index, led by higher stock prices and a high yield spread. However, five of the 10 components made negative contributions, with weakened consumer confidence and a decline in the real money supply contributing the largest drags. May's reading is consistent with an economy that has stalled but not collapsed.