ICS Magazine

U.S. home building plummets, rate rises likely curtailed

July 21, 2004
WASHINGTON (AFP) - New U.S. home building plummeted in June, a fresh sign of economic softness likely to curtail the pace of rising interest rates.

Housing starts crumbled 8.5 percent in June to a seasonally adjusted annual rate of 1.80 million homes, a 13-month low, from 1.97 million in May, the Commerce Department said Tuesday.

Compared to last year, starts were down 2.6 percent.

"It was much weaker than expected," said BMO Financial Group analyst Sal Guatieri.

"It seems to be consistent with a slew of June indicators that suggest some softening in economic activity in that month. We still don't know if that is the beginning of a new weaker trend or whether it is a one-month aberration from a strong trend."

Permits authorizing new housing -- a barometer of future activity -- plunged 8.2 percent from May to an annual rate of 1.92 million homes in June. But permits were up 2.8 percent from last year.

"Housing has been a mainstay of the expansion and there is little doubt that activity will decelerate as we move through the year," said Naroff Economic Advisors president Joel Naroff.

"Just as we need to get back to more normal interest rates, the low-rate hyped sectors have to move back to more sustainable levels. That is the process we are going through and it will not dissuade the Fed from its rounds of rate hikes," he said.

Among other signs of a slacker pace in June: employers hired 112,000 extra workers, fewer than half the number expected, retail sales fell by a seasonally adjusted 1.1 percent, and US industry cut output 0.3 percent.

US Federal Reserve chairman Alan Greenspan, due to give a semi-annual monetary policy address to a Senate banking panel later Tuesday, is expected to discuss the sluggish mid-summer data.

Federal Reserve policymakers on June 30 raised the federal funds target rate, which commercial banks charge each other, by 0.25 percentage points to 1.25 percent.

It was the first rate increase in four years.

Bankers said they planned to take a "measured" approach to future moves, widely expected to return the short-term rate to neutral -- about 4.0 percent at the current inflation rate -- by the end of 2005.

"We expect Federal Reserve chairman Greenspan in his semi-annual monetary policy address to communicate that overall he remains optimistic on the outlook for economic growth, sanguine about the underlying inflation picture, and patient ("measured") with regard to raising short-term interest rates," said a report by Merrill Lynch senior economist Kathleen Bostjancic and chief North American economist David Rosenberg.

"However, while remaining upbeat on the prospects for continued economic growth, he will no doubt mention the observed slowdown in economic activity during June. Additionally, we expect the Feds central tendency forecasts for real economic growth in 2004 to be revised down from the previous forecasts," they said.