By Courtney Schlisserman and Shobhana Chandra
June 17 (Bloomberg) -- The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated.
Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington. Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.
``The latest round of commodity-price pressure is adding to both inflation and weak growth,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``It's a pretty negative cocktail for the economy and financial markets.''
The reports underscore the Fed's dilemma as officials try to prepare investors for an interest-rate increase. Too strong a crackdown on inflation may delay an economic rebound, while waiting too long risks a price outbreak that may need even higher borrowing costs to tame.
``We should be moving sooner rather than later,''William Poole, a former president of the St. Louis Fed, said in an interview today with Bloomberg Television in New York. ``I don't think you can interpret what's happening with energy as a temporary shock.''
Treasuries rose after the figures, while the dollar was little changed. Benchmark 10-year note yields dropped to 4.24 percent at 10:47 a.m. in New York, from 4.27 percent late yesterday. Stocks were little changed.
`The Stag Part'
``Industrial production is down, that's the stag part, and prices are up, that's the inflation part,'' said Neal Soss, chief economist at Credit Suisse Holdings Inc. in New York. Compared with the 1970s, though, ``it's not likely that inflation will get as out of control when wages do not respond.''
The producer-price index jump exceeded the 1 percent forecast among economists surveyed by Bloomberg News. It was the biggest increase since November. The Labor Department's figures also showed that prices rose 0.2 percent excluding food and energy, a measure that matched economists' predictions. Production was expected to increase 0.1 percent.
``This period of stagflation is lasting longer than expected,'' said Harris. ``It's not to say that we are back in a 1970s-type situation. We have a much more credible central bank,'' no wage and price controls and ``the labor markets are behaving well.''
Foreclosure Impact
Housing starts retreated to a 975,000 annual pace. Analysts forecast a decline to 980,000. Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects. Spending on residential projects may continue to be a drag on growth the rest of this year as builders try to work off excess inventories.
``The downtrend is still in place,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``Inventories are still very high, prices are still coming down. None of that argues for a turnaround yet.''
Starts decreased in three of four regions, led by a 25 percent drop in the Midwest. Construction fell 10 percent in the West and 4.4 percent in the South. Starts increased 62 percent in the Northeast, led by a rebound in multifamily projects.
Residential construction has subtracted from economic growth every quarter since the first three months of 2006, culminating in a 25.5 percent drop in the first quarter that was the largest since 1981.
Hovnanian, Toll
Hovnanian Enterprises Inc., New Jersey's largest homebuilder, reported its seventh consecutive quarterly loss on June 3 and said the value of its land continued to decline. Toll Brothers Inc., the largest U.S. builder of luxury homes, reported its third consecutive quarterly loss the same day.
Producers paid 7.2 percent more for goods from May 2007, compared with a 6.5 percent gain in the 12 months ended in April. Excluding food and energy, the increase was 3 percent from a year earlier, the same as in the prior month.
Food was 0.8 percent more costly, after no change the previous month. Pork increased by the most since 1999.
Gasoline, Diesel
Producers paid 9.3 percent more for gasoline, the biggest increase since November, and diesel fuel gained 11.2 percent, the report showed. Natural gas costs were up 5.7 percent from the previous month.
The wholesale-price report is based on figures for the Tuesday of the week that includes the 13th of the month. On that basis, crude oil cost about $12 a barrel more in May on the New York Mercantile Exchange than the prior month. Oil futures prices reached a record $139.89 a barrel yesterday.
Some companies are trying to recoup expenses. Dr Pepper Snapple Group Inc., the beverage company spun off by Cadbury Schweppes Plc in April, said first-quarter profit rose after it raised prices to counter soaring ingredient and fuel costs.
``Our industry, and the economy as a whole, continue to face significant headwinds especially in the area of higher commodities and fuel costs,'' Chief Executive Officer Larry Young said on a conference call this month.
Others are finding it tough to keep up with the jump in costs. FedEx Corp., the second-largest U.S. package-shipping company, in May cut its profit forecast for the second time this year after surging fuel prices raised costs by at least $100 million more than estimated. FedEx had already boosted its fuel surcharge on express shipments in early May.
``While we have dynamic fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices,'' Chief Financial Officer Alan Graf said in a statement last month.
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Tuesday, June 17, 2008
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