Housing woes deepen

The week's economic reports revealed further deterioration in the U.S. residential real estate market, with housing starts off sharply and the Federal Reserve chairman warning that the "further contraction in housing is likely to be a significant drag on growth." Outside of the housing sector, however, there were encouraging signs, as a closely watched gauge of consumer prices suggested inflationary pressures remain under control. For the week, the S&P 500 Index fell 3.9% to 1,501 (for a year-to-date total return of 7.4%). The yield of the 10-year U.S. Treasury note fell 30 basis points to 4.40%.

 

Fed report, chairman highlighted housing concerns

The Fed's anecdotal survey of regional economies, known as the Beige Book, found "additional declines in home sales, prices, and construction" throughout the country. Lenders, meanwhile, experienced "an increase in delinquencies and slight deterioration in credit quality" related to the housing slowdown. Overall, the report said, economic growth continued in September and early October, "but the pace of growth decelerated since August." Separately, Fed Chairman Ben S. Bernanke discussed his concerns about the housing slump during a speech on Monday. Bernanke said the slowdown would probably hinder economic growth during the current quarter and through early next year. He noted that home sales "have fallen further and new residential construction has continued to decline rapidly." However, the Fed chairman said the broader U.S. economy's performance has been "reasonably good" this year, with the unemployment rate up "only a little from its recent lows."

 

Housing starts plummeted

New residential construction sunk to a 14-year low in September, dropping to 1.19 million units. The latest figure represented a 10.2% decline from the previous month and a 30.8% falloff from the year-ago level. One exception to the overall trend was the Northeast region, which saw a 45% jump in housing starts. The Northeast was rebounding from the previous month, when it had been the region that suffered the steepest slide in housing starts, down 35.3% in August. Permits for new housing—a key measure of expected future demand—fell to 1.23 million, down 7.3% from the previous month and down 25.9% from the year-ago level.

 

Consumer prices rose modestly

The Consumer Price Index (CPI), an inflation barometer, was up 0.3% in September, boosted by higher food and energy prices. The core CPI, which excludes food and energy, was up 0.2%, which was in line with economists' expectations and consistent with the level seen in each of the previous three months. Over the past year, the core CPI is up 2.1%, considered by analysts to be a relatively modest level of inflation.

 

Economic indicators moved higher

The Conference Board's index of leading economic indicators—a gauge of potential future economic activity—rose 0.3% in September. Higher stock prices and lower jobless claims contributed to the gain, while lower building permits were a drag on the index.

Industrial production nudged upward

Industrial production edged up 0.1% in September, after having been unchanged in August. Manufacturing sector output rose 0.1% in September after a decline of 0.4% in August. Utility output dipped 0.1%, reflecting lower production of natural gas. Capacity utilization in the industrial sector was unchanged at 82.1%, modestly above the historical average of 81.0%.

 

The economic week ahead

The slumping U.S. housing market will be in the spotlight again next week, with reports on existing home sales (Wednesday) and new home sales (Thursday). Also scheduled to be released is the monthly report on durable-goods orders (Thursday).