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Economic Watch: Housing Drops as Industrial Production, Inflation Bounce Back

February 17, 2016

By Evan Lockridge

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New home starts in the U.S. fell in January to the lowest level in three months, but industrial production, which includes manufacturing, reversed its string of recent declines. At the same time, wholesale prices increased, leading some to believe interest rates may soon move higher.

The construction of new homes fell 3.8% from the month before, to an annual rate of 1.1 million. All regions of the country posted declines, according to the Commerce Department. December’s level was revised down slightly to a 2.8% decline, while the November increase was revised to 9.8%.

An indicator of future building activity, the number of new homebuilding permits issued, fell in January 0.2% following no overall change in December. It was driven mainly by a drop in single-home permits.

“The slower pace of homebuilding activity to kick off 2016, while disappointing, may reflect, in part, severe snow storms in the Northeast, with single-family starts falling sharply in the month,” said Laura Cooper, economist at RBC Economics. “Moreover, an outsized drop in the typically volatile multiple-unit component in the Midwest also accounted for a bulk of the weakness in January. Importantly, permit issuance remained solid in January, suggesting that underlying trends in the volatile starts data are likely stronger than implied by the recent monthly reports.”

The report follows one from Tuesday showing builder confidence in the market for newly built single-family homes fell three points to 58 in February from an upwardly revised January reading of 61, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

“Builders are reflecting consumers’ concerns about recent negative economic trends,” said NAHB Chief Economist David Crowe. “However, the fundamentals are in place for continued growth of the housing market. Historically low mortgage rates, steady job gains, improved household formations and significant pent up demand all point to a gradual upward trend for housing in the year ahead.”

The survey also reflected builder concerns about the high cost and lack of availability of lots and labor.

Manufacturing Helps Push Industrial Production Higher

A report from the U.S. Federal Reserve on Wednesday show industrial production increased 0.9% in January after dropping for a third consecutive month in December by a revised 0.7%.

The index for utilities jumped 5.4%, with demand for heating moving up markedly after being suppressed by unseasonably warm weather in December. Manufacturing output increased 0.5% in January and was 1.2% above its year-earlier level, while mining production was unchanged following four months with declines.

At 106.8% of its 2012 average, total industrial production in January was just 0.7% below its year-earlier level. Capacity utilization for the industrial sector increased 0.7 of a percentage point in January to 77.1%, a rate that is 2.9 percentage points below its 1972–2015 average.

The report "indicates an encouraging start to the year for the industrial sector after a period of broad-based weakness in the second half of 2015 and particularly the fourth quarter,” said Josh Nye, RBC economist. “Although manufacturing output posted a solid gain, the boost from utilities output reflects the reversal of temporary factors, while the less transitory headwinds of energy sector weakness and a strong U.S. dollar will likely continue to weigh on activity in the manufacturing and mining sectors in 2016."

The report helps bolster sentiment about the health of the nation’s manufacturing sector, following earlier reports that conditions have improved following weak performance in the latter part of 2015.

Producer Prices Show Inflationary Pressures

This report was released the same day as one from the Labor Department showed prices at the wholesale level increased 0.1% in January following a 0.2% drop in December.

The Producer Price Index posted its 12th year-over-year decline, falling 0.2% in January from a year earlier. However, that was up from a 1% rate of decline in December, a possible sign a global glut in commodities and energy may be abating, according to Marketwatch. That could also soon translate into higher retail inflation.

PPI core prices, which strip out volatile food and energy sectors, was up 0.4% for the month, stronger than December’s 0.2% increase.

“A larger-than-expected increase in producer costs led by a rise in service prices helps reignite confidence that inflation pressures are on the rise,” said Lindsey Piegza, chief economist the Stifel Fixed Income. “With 12 consecutive months of still-negative headline inflation, a moderate rise to a one-year high is a welcome step in the right direction, at least from the standpoint of policy officials desperate to stoke inflation pressures.”

She said while there is still a long way to go to reach the Federal Reserve’s longer-term objective of a 2% annual rate of increase, this hike “helps support policymakers' thesis that the U.S. economy is ready and able to withstand a rising rate environment, and furthermore, that the December liftoff was the appropriate policy move.”

RBC said it expects the Fed to hike interest rates another quarter point in the second quarter of the year. The increase in late 2015 was the first one in years after being around zero.

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