Housing Starts Jump in July; Consumer Prices Remain Tame

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Residential Construction Ahead Of Housing Starts Data
Luke Sharrett/Bloomberg via Getty Images
By Lucia Mutikani

WASHINGTON -- U.S. housing starts surged to an eight-month high in July, suggesting the nation's housing market recovery was back on track after stalling in the second half of last year.

While the rebound points to sustained economic strength, other data Tuesday showed inflation largely under wraps, which could give the Federal Reserve room to maintain its ultra-easy monetary policy stance for a bit longer.

"The Fed will find these data further supportive of the go-it-slow approach to exiting its accommodative policies," said Dan Greenhaus, chief strategist at BTIG in New York.

Groundbreaking for new housing jumped 15.7 percent last month to a seasonally adjusted 1.09-million unit annual pace, the highest level since November, the Commerce Department said. The gain snapped two straight months of declines and beat economists' expectations for a rise to only a 969,000-unit rate.

It was the latest sign the market was regaining its footing after being slammed by a run-up in interest rates last year. A shortage of properties for sale has also lifted prices, pushing housing out of the reach of many first-time buyers.

Separately, the Labor Department said its Consumer Price Index edged up 0.1 percent last month as declining energy costs partially offset increases in food and rents. The CPI had increased 0.3 percent in June.

In the 12 months through July, the CPI increased 2 percent after advancing 2.1 percent in June.

While the so-called core CPI, which strips out volatile food and energy costs, ticked up 0.1 percent for a second straight month, economists said there was no evidence the underlying trend in inflation was shifting lower. Rents, which account for more than a third of the CPI basket, increased 0.3 percent in July and were up 2.9 percent from a year ago.

In the year through July, the core CPI was up 1.9 percent.

The Fed targets 2 percent inflation, but it tracks an index that is running lower than the CPI.

Fed Watching Wages

Most economists don't expect the U.S. central bank to raise benchmark rates until around the middle of next year, given sluggish wage growth. It has kept rates near zero since December 2008.

Average weekly earnings adjusted for inflation rose 0.3 percent year-on-year in July after a 0.2 percent dip in June, the Labor Department said.

"Fed Chair [Janet] Yellen considers income growth as the key to future inflation issues and since she doesn't see any wage gains just yet, she will likely continue on course," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

"As for investors, limited inflation and stronger housing are nothing but good news since they imply good growth ahead without the Fed having to move prematurely."

U.S. stocks rose on the data, with homebuilders such as PulteGroup (PHM) and D.R. Horton (DHI) rallying. The PHLX housing sector index was up 1.7 percent in late morning trading, outperforming the broader market.

In another bright sign, home improvement retailer Home Depot (HD) reported second-quarter earnings that topped Wall Street expectations and it raised its full-year profit forecast, sending its shares up 5.9 percent.

Groundbreaking for single-family homes, the largest part of the market, increased 8.3 percent in July to a seven-month high. Single-family starts in the South, where about half of the single-family construction takes place, rebounded 16.9 percent after dropping sharply in June.

Starts for the volatile multifamily homes segment jumped 33 percent to the highest level since January 2006. This market is being buoyed by a shift towards renting, as many prospective buyers give up on the dream of owning a house.

Building permits increased 8.1 percent, the largest gain since April 2013. Permits for single-family homes rose 0.9 percent to an eight-month high, while permits for multifamily housing soared 23.6 percent.

"The recovery in both starts and permits is a welcome development that ... puts us back on a modest trend for residential investment activity," said Bricklin Dwyer, an economist at BNP Paribas in New York.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Housing Starts Jump in July; Consumer Prices Remain Tame
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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