U.S. Economy: Housing, Price Reports Raise Stagflation Danger

By Shobhana Chandra and Timothy R. Homan

Aug. 19 (Bloomberg) -- U.S. builders broke ground on the fewest new homes in 17 years and producer prices climbed the most since 1981, providing no sign of an economic recovery or easing inflation.

Housing starts fell 11 percent in July to an annual rate of 965,000, the Commerce Department said today in Washington. The Labor Department reported the producer price index jumped 9.8 percent from a year before.

``There's no doubt we're in a period of stagflation now,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who formerly worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.

Stock indexes headed for their biggest two-day loss in more than a month. The Standard & Poor's 500 Stock Index dropped 0.7 percent to 1,269.11 at 10:40 a.m. in New York, with the S&P Supercomposite Homebuilding Index down 1.7 percent. Treasuries were little changed, with 10-year notes yielding 3.82 percent.

Compared with July 2007, work began on 30 percent fewer homes. Building permits, a sign of future construction, also fell in July, the Commerce Department reported. They were down 18 percent to a 937,000 annual pace.

Starts were projected to fall to a 960,000 annual pace, according to the median forecast of 77 economists polled by Bloomberg News. The median estimate for permits was 970,000.

`Pull Back'

``A recovery will not happen this year,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``Not only are mortgage rates creeping up, but financing is becoming more difficult for a lot of people. Builders will continue to pull back.''

The 1.2 percent increase in producer prices from the previous month followed a 1.8 percent increase in June, the Labor Department said. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June.

Prices paid to factories, farmers and other producers were forecast to rise 0.6 percent, according to the median of 77 forecasts. The core index was projected to advance 0.2 percent.

``The recent burst of cost-push inflation is giving the beast digestion problems that might manifest themselves in the form of a lingering inflationary fever,'' Dallas Fed President Richard Fisher said in a speech in Aspen, Colorado, today.

Fed Chairman Ben S. Bernanke told U.S. lawmakers last month that officials ``continue to expect inflation to moderate in 2009 and 2010, as slower global growth leads to a cooling of commodity markets,'' while viewing the outlook ``as unusually uncertain.''

Commodity Costs

The jump in the producer price index reflected a surge in commodity costs that has since waned. At the same time, the acceleration in costs excluding food and fuel raises concern about a pass-through to consumer prices.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. Import prices rose 1.7 percent in July and consumer prices increased 0.8 percent for the same period, the Labor Department said last week. Both figures were higher than estimated.

Construction of single-family homes fell 2.9 percent to a 641,000 rate, the fewest since January 1991, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 24 percent from the prior month to an annual rate of 324,000.

``The news ahead for housing remains bad,'' Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a Bloomberg Radio interview. ``There's a corrective process we have to get through here.''

Northeast Sales

The decrease in starts was led by a 30 percent decline in the Northeast. Construction fell 8.2 percent in both the South and West. Starts in the West slumped to a 26-year low. The Midwest showed a 10 percent gain.

The magnitude of the July drop in the Northeast reflected, in part, a payback from an unexpected surge the prior month. Starts and permits jumped in June as builders hurried to break ground ahead of new regulations in New York City's building code that took effect July 1.

Underneath the gyrations, demand is weakening. Sales of existing homes fell to a 10-year low in the second quarter, according to the National Association of Realtors. A third of all sales were foreclosures or ``short sales,'' in which lenders take a loss on a property.

Financing is also becoming tougher, a quarterly survey of banks by the Federal Reserve showed. Compared with the April survey, more of the loan officers polled reported they tightened standards on prime mortgage loans and on non-traditional loans.

Toll on Retailers

The slumping U.S. economy is taking its toll on retailers from luxury chain Saks Inc. to discounter Target Corp., reports showed today. Saks reported its largest quarterly loss in two years, while profit dropped for a fourth straight quarter at Target. Home Depot Inc., the biggest home improvement chain, posted its seventh sales decline in eight quarters.

Falling retailer earnings may signal that the U.S. economy will deteriorate further as consumers rein in spending to cope with rising unemployment and inflation. Home Depot Chief Executive Officer Frank Blake told analysts today he was ``cautious'' about consumer spending through mid-2009.

The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.

Builders are pessimistic as losses mount. The National Association of Home Builders/Wells Fargo's sentiment index yesterday showed optimism held at a record low in August for a second month.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: August 19, 2008 11:12 EDT