Home Building, Factory Use Decline in March

Construction of homes and apartments dipped 2.4% in March, the Commerce Department reported Wednesday. Even so, the construction industry remained one of the economy’s bright spots.

Meanwhile, the Federal Reserve Board reported that American factories operated at 79.4% of capacity in March, the lowest level in more than two years.

The Commerce Department reported that construction was started at a seasonally adjusted annual rate of 1.95 million units in March, the third consecutive month that the building pace has been more than 1.9 million units.

This represented a 12.4% increase over the pace during the final three months of 1985 and put building activity at the highest level since 1978, when building starts stayed above 1.9 million units for 10 straight months.

The big upturn in construction was credited to builder optimism that the lowest mortgage rates this decade will lead to strong sales.

“Builders’ expectations for the next six months are the strongest they have been in nine years. Our April survey found a big jump in both expectations of future sales and traffic through new homes,” said Michael Sumichrast, chief economist for the National Assn. of Home Builders. “Things couldn’t be much better. Everybody is happy.”

Data Resources predicted that housing starts this year will total 2.04 million units, 17% above last year and the highest level since 1973.

“Housing is about the only bright spot in the economy right now,” Data Resources economist David Wyss said.

The 2.4% March decline in housing starts followed a 1.8% dip in February, but both months were only small setbacks from January, which saw 2.03 million units started on an annual basis.

Construction of single-family homes rose 0.7% last month to an annual rate of 1.21 million units, while construction of multifamily units fell 7.1%.

The overall decline was led by a sharp 19.2% drop in construction activity in the Northeast, followed by an 8% drop in the Midwest.

Construction was up by 3.8% in the South and by 6.7% in the West.

The plunge in interest rates has helped to push mortgage rates below 10% for the first time since 1978, with economists predicting that they will go lower still.

At the White House, spokesman Larry Speakes said, “With mortgage rates still dropping and personal income still rising, we expect the housing industry to be exceptionally strong in the months ahead.”

But David Smith, president of the National Assn. of Home Builders, said home buyers who wait for rates to go lower may have to pay higher prices. He said that lumber costs have jumped 20% in recent months and that home prices, which have been rising at the same rate as overall inflation, may begin moving up at twice the inflation rate.

The Fed said the operating rate at the nation’s factories, mines and utilities fell by 0.6 percentage point in March after declining by 0.7 percentage point in February.

The back-to-back declines left the operating rate at its lowest level since December, 1983, when it was 78.3%.

The big March decline came from weakness in auto production and petroleum refining, mirroring declines reported Tuesday in the industrial production index.

The operating rate in the auto industry plunged 9.4 percentage points to 75.7% as auto makers cut back production in an effort to trim growing inventories.

The operating rate in petroleum refining declined sharply for the second month in a row after rising by nearly 5 percentage points in January.

The operating rate for manufacturers dropped to 79.3%, down from 79.9% in February. Factories producing durable goods--items expected to last three or more years--saw their operating rate decline to 76.3%, down from 77.2% the month before.

In a third report, the government said U.S. businesses plan to increase spending on modernization and expansion projects by a tiny 0.9% in 1986, after adjusting for inflation, the smallest increase since 1983.

The estimate, based on a survey of businesses completed in March, marked a slight improvement over the original survey last fall, which found businesses expecting to cut spending by 1%.