Wholesale prices up 0.7%

March dip in housing starts biggest in 14 years

Signs of slowdown expected to keep interest rates lower

April 20, 2005|By KNIGHT RIDDER/TRIBUNE

WASHINGTON - Housing starts fell 17.6 percent in March, the biggest monthly drop in more than 14 years, fueling fears that the nation's four-year housing boom might be slowing.

The housing numbers were released yesterday by the Commerce Department as the Labor Department announced that producer prices shot up 0.7 percent last month, largely because of soaring energy costs.

There was good news embedded in yesterday's bad news. Higher energy costs accounted for virtually all the rise in producer prices and, because the housing and inflation numbers point to an economic slowdown, they could make it less likely that the Federal Reserve will raise interest rates aggressively next month. That would keep lending rates low, allowing the housing boom to continue.

Wall Street rebounded on yesterday's news. After losing 436 points in four successive days, the Dow Jones industrial average rose 56.16, or 0.6 percent, to close at 10,127.41. The Standard & Poor's 500 index also was up 0.6 percent, or 6.80 points, at 1,152.78 and the Nasdaq composite index closed up 19.44, or 1 percent, at 1,932.36.

March's housing-start numbers aren't as bad they appear, said David Wyss, chief economist for the credit-rating agency Standard & Poor's in New York. The drop followed monthly numbers that were at 20-year highs, he said, and much of the nation was unusually wet or cold last month, slowing construction.

"It's too early to get excited about this. You are coming off huge numbers in January and February," Wyss said, noting that although housing starts fell, permit applications were higher than in March 2004. "When permits and starts are oscillating differently, then it's probably weather-related."

Economists are paying close attention to housing numbers because of widespread fears that prices are inflated and could endanger the economy. Home prices rose 32.4 percent nationwide from 2000 to 2004, and many economists think today's housing market resembles the overheated stock market of the late 1990s, which collapsed.

The National Association of Home Builders in Washington saw the March numbers as an aberration. "There really are temporary factors in that big decline," said David Seiders, chief economist for the association. He expects a backlog of permits to result in sharp gains in this month's housing starts.

Aberration

The National Association of Realtors projects a banner year for sales of new and previously owned homes.

"We're projecting starts to have their best performance since 1978," said spokesman Walter Molony, expecting a 1.4 percent increase this year to 1.98 million housing starts.

Realtors also expect sales of previously owned homes - which account for 85 percent of home sales - to be the second-best on record. The association forecasts home sales with its Pending Home Sales Index, and the latest reading, published April 4, showed a 2.2 percent increase in expected home sales for March. That would mean a continuing boom.

The biggest threat to the economy and home sales is rising oil prices and their potential to drive inflation. Interest rates rise or fall partly in response to the threat of inflation, so oil prices and inflation threaten the housing market's health.

The Labor Department said its Producer Price Index - a measure of the wholesale prices that farmers, factories and refineries pay - rose 0.7 percent in March, the biggest jump in five months, as gasoline prices climbed 5.3 percent. Energy prices rose 3.3 percent overall. The numbers showed oil's inflationary shock waves spreading across the economy.

Core inflation

The monthly numbers also showed that core inflation - the measure of prices excluding energy and food - rose 0.1 percent last month, suggesting that outside oil prices, inflation is in check.

With core inflation appearing to be under control, Federal Reserve bankers are thought unlikely to seek an aggressive half-point interest-rate increase when they meet next month.

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