US Housing Starts Fall Unexpectedly in July

Housing starts unexpectedly dropped by 1% in July to an annualized 581,000. Expectations had been for a 2.7% increase to 598,000. However, the decline follows sizeable gains in the previous two months of 6.5% in June (upwardly revised from 3.4%) and 15% in May (downwardly revised from 17.3%). Thus, the level of activity in July is still well above the second-quarter average of 539,000, which reflected the recent trough in housing starts in April of 479,000.

Thedecline in July was the result of the volatile multiples component unexpectedly falling 13.3% to an annualized 91,000. In contrast, the more stable singles component continued to trend higher from a recent low at the start of this year of 357,000,although July’s gain was a relatively modest 1.7%, resulting in an annualized level of 490,000.

Regionally, most of the weakness was concentrated in the Northeast where activity fell 16.3%. Declines were also recorded in the West (1.6%) and the South (1.4%). Activity in the Midwest managed to show a relatively strong gain of 12.9%.

Producer prices-In a separate report out this morning, producer prices for July were much weaker than expected, dropping 0.9% compared to expectations of a 0.3% decline. Part of the downward surprise was in gasoline prices, which sank 10.2%. Food prices were also much weaker than expected, dropping 1.5%. The drop in the latter more than retraced the unexpected 1.1% rise in June food prices. Excluding these two volatile components, core prices were weaker than expected as well, dropping 0.1% relative to an expected 0.1% rise. Much of the downward surprise in the core component resided in a 1.7% drop in passenger car prices.

Rising starts for single-detached units follow earlier indications of increasing home sales, falling inventories of unsold homes and reviving builder confidence. In aggregate, these releases reinforce the view that housing activity is starting to turn around. However, despite some signs of improvement, housing activity still remains very weak. For example, the July level of starts represents only about one-quarter of the recent annual peak in 2005 of 2.1 million units.

As a result, the Fed is expected to keep monetary conditions accommodative to further sustain this recent improving trend not only for housing but the overall economy as well. Indications of weak producer prices, also reported this morning, provide further scope for the Fed to keep interest rates low. Our forecast does not have Fed funds rising from its current range of 0% to 0.25% until the fourth quarter of 2010.

Producer prices- In a separate report out this morning, producer prices for July were much weaker than expected, dropping 0.9% compared to expectations of a 0.3% decline. Part of the downward surprise was in gasoline prices, which sank 10.2%. Food prices were also much weaker than expected, dropping 1.5%. The drop in the latter more than retraced the unexpected 1.1% rise in June food prices. Excluding these two volatile components, core prices were weaker than expected as well, dropping 0.1% relative to an expected 0.1% rise. Much of the downward surprise in the core component resided in a 1.7% drop in passenger car prices.