Building of homes tumbles, inflation edges up, reports say

November 19, 2009|Alan Zibel and Martin Crutsinger, Associated Press

WASHINGTON - The budding economic recovery is not getting much help from the home-building industry, which typically creates jobs and drives growth when a recession ends.

Uncertainty over whether a federal homebuyer tax credit would be extended weighed down construction last month - a sign of how much the fledgling recovery depends on government support.

Home building unexpectedly plunged to its lowest point since April, the Commerce Department said yesterday. The building of homes and apartments fell 10.6 percent in October, to a seasonally adjusted annual rate of 529,000. The figures show that builders fear there are not enough buyers to soak up the glut of unsold homes on the market - a supply magnified by record-high foreclosures.

Congress renewed the tax credit this month and broadened its reach. But even with government aid, the weakness of the housing sector is dragging on the economy.

“It will take a while before residential construction begins to contribute meaningfully to growth,’’ Jennifer Lee, an economist at BMO Capital Markets, wrote in a research note.

The tepid recovery is holding down inflation, though. While consumer prices edged up faster than expected in October, they remain lower than they were a year ago. And inflation is expected to stay subdued.

The Labor Department said consumer prices rose 0.3 percent in October, a bit more than the 0.2 percent economists had expected. Core inflation, which excludes energy and food, rose 0.2 percent, compared with expectations for a 0.1 percent rise.

The higher figure was driven by the biggest jump in new-car prices in 28 years. The prices of used cars and trucks also rose by the most since September 1980. Together, new- and used-car prices accounted for 90 percent of the increase in core inflation last month, government analysts said.

Analysts said the jump in used-car prices was due partly to the government’s cash for clunkers rebate program. The program reduced the stockpile of used vehicles.

The clunkers program also drove up new-car prices, analysts said. It helped reduce the supply of new cars just as the latest model-year vehicles, which typically carry a premium, were arriving in showrooms.

“The cash for clunkers program may have wiped out the ’09 models that have been sitting there, but the brand-new 2010 models come, and they can command a higher price for those,’’ said James Brock, an economist at Miami University in Ohio.

On Wall Street, stocks edged down after the unexpected drop in home construction and disappointing forecasts from technology companies. The modest drop came a day after major stock indicators closed at 13-month highs, including the Dow Jones industrial average, which had risen nine of the past 10 days. The Dow lost about 11 points yesterday, and broader indexes also declined.