Surprise Rise for Housing Starts

U.S. housing starts increased 5.3% in November, defying Wall Street expectations of a slowdown, while producer prices posted their biggest drop since July 2004 and showed well-contained inflation outside the volatile energy and food areas, the government said Tuesday.

Economists and market participants said the price data might ease inflation concerns and the Federal Reserve would see the continued strength in housing construction as a sign the economy was not slowing.

“Housing starts dovetail with the stronger outlook on the economy,” said John Beerling, regional foreign exchange trading desk manager at Wells Fargo in Minneapolis.

“Even though prices are a little weaker, we are looking at an economy that is probably keeping the Fed on the same pace” of interest rate increases, he said.

The Commerce Department said November housing starts rose to a 2.123-million-unit annual rate, faster than the 2.017-million-unit annual rate expected by Wall Street economists, who had anticipated rising mortgage rates would cool activity.

October starts were revised up to a 2.017-million-unit annual pace from the originally reported 2.014-million-unit rate.

Single-family housing starts rose 4.8% to a 1.808-million-unit annual rate while groundbreaking on multifamily units jumped 7.9% to a 315,000 unit pace. Construction increased throughout the country, except in the U.S. South, and the West posted the fastest pace of starts in almost 27 years.

“It’s a big surprise,” said Christopher Low, chief economist at FTN Financial in New York. “There has been plenty of anecdotal evidence of regional weakness, but none of the national numbers have shown weakness.”

Permits for future construction, an indicator of builders’ confidence, shot up 2.5% to a 2.155-million-unit pace. Economists expected permits to fall to a 2.093-million-unit pace from October’s revised 2.103-million-unit pace.

U.S. producer prices fell a larger-than-expected 0.7% last month, the biggest drop in 2 1/2 years, according to a Labor Department report.

The drop in the producer price index, a gauge of prices received by farms, factories and refineries, was the largest since April 2003 and reflected a 4% drop in energy costs, which swamped a 0.5% gain in food prices, the department said.

The core PPI, which strips out those volatile costs to provide a better gauge of underlying inflation pressures, edged up just 0.1%.

Wall Street economists had expected overall producer prices to drop 0.5%, with the core index up 0.2%.

Like a report on consumer prices issued last week that showed the biggest decrease in prices since July 1949, the producer price data could help ease inflation concerns.