Production Probably Driving U.S. Recovery as Home Construction Languishes

Production Probably Driving U.S. Recovery as Home Construction Languishes

Builders broke ground on 598,000 homes at an annual rate, up 10.5 percent and the most since April, following a 541,000 pace in July, the Commerce Department said in Washington. Photographer: Jim R. Bounds/Bloomberg

Builders in the U.S. probably started fewer homes in September, while production rose for a seventh month, evidence of uneven growth, economists said before reports this week.

Work began on 580,000 houses at an annual rate, down 3 percent from August, according to the median estimate of 56 economists surveyed by Bloomberg News before Commerce Department figures on Oct. 19. A Federal Reserve report tomorrow is forecast to show output at the nation’s factories, mines and utilities increased 0.2 percent for a second month.

Mounting foreclosures, home sales near record lows and a lack of jobs will make it difficult for housing to recover from the worst recession since the 1930s. Manufacturers, responding to rising business investment and stronger economies overseas, remain a bright spot for the recovery, which Fed officials have said may require an additional boost from easier policy.

“Housing has remained a drag in this recovery and the growth has really come from manufacturing,” said Michelle Meyer, a senior U.S. economist at BofA Merrill Lynch Global Research in New York. “Key to a sustained recovery is job creation and that’s been insufficient. Given the backdrop of unemployment and continued weakness in the housing market, we believe the Fed will ease policy further.”

Fed Chairman Ben S. Bernanke last week said more action may be warranted because inflation is too low and unemployment is too high. “There would appear -- all else being equal -- to be a case for further action,” Bernanke said in remarks given at a Boston Fed conference.

Shares Rally

Speculation that the Fed may purchase bonds has spurred a rally in stocks and pushed down Treasury yields to record lows. The Standard & Poor’s 500 Index has gained 12 percent since the end of August.

Housing’s inability to rebound is one reason the economic recovery is not strengthening. Housing permits, a sign of future construction, probably rose last month, according to the median estimate, a sign the real estate market has at least stabilized.

After reaching a record low in March 2009, permits climbed through April this year, the deadline to sign purchase contracts and become eligible for a government tax credit. Since the end of the incentive worth as much as $8,000, sales and construction have again weakened.

Foreclosure Investigations

With foreclosures reaching a record in September, U.S. regulators last week said they were investigating whether employees of lenders including Ally Financial Inc., JPMorgan Chase & Co. and Bank of America Corp. had falsified documents used in the proceedings. Ally Financial and Bank of America are among banks that have suspended some foreclosures or evictions to review paperwork, which may further delay a recovery in housing.

Carmakers are among manufacturers seeing a pickup in the U.S. Auto sales increased in September, reaching a seasonally adjusted 11.8 million pace, the fastest since the federal government’s “cash for clunkers” incentive program last year.

Another report from the Philadelphia Fed on Oct. 21 will show the region’s factories expanded this month after contracting in each of the prior two months, according to economists surveyed.

Companies such as Caterpillar Inc. and General Motors Co. are benefiting from expanding markets in China and Brazil and ongoing capital investment in the U.S. even as unemployment restrains consumer spending.

Rising Shipments

CSX Corp. Chief Executive Officer Michael Ward said Oct. 13 increased U.S. auto production is helping drive a gradual economic recovery. Total shipping volumes at the second-largest publicly traded U.S. railroad rose 10 percent and sales increased 16 percent.

Except for housing, “we’re seeing things continue their gradual recovery,” Ward said in a telephone interview.

The Conference Board’s index of leading economic indicators, due Oct. 21, rose 0.3 percent in September for a second month, according to economists surveyed. The gain signals the economy will keep expanding in the next three to six months.

Stronger-than-forecast retail sales and inventory numbers prompted economists at Credit Suisse last week to raise their forecast for third-quarter economic growth to 2.6 percent from 2 percent before the report. They lowered their fourth quarter growth forecast to 1.6 percent from a prior 2.2 percent estimate, partly due to less homebuilding.

The economy expanded at a 1.7 percent annual pace in the second quarter after a 3.7 percent rate the previous three months.

With the approaching Nov. 2 congressional elections, Americans continue to have a dimmer view of Congress and President Barack Obama’s handling of the economy. Obama’s job approval over a three-day period that ended Oct. 12 was 45 percent, compared with 52 percent at the same time last year, according to a poll from Princeton, New Jersey-based Gallup.

Bloomberg Survey

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Release Period Prior Median
Indicator Date Value Forecast
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Total TICS $ Blns 10/18 Aug. 63.7 50.0
Net Long Term TICS $ Bl 10/18 Aug. 61.2 60.9
Ind. Prod. MOM% 10/18 Sept. 0.2% 0.2%
Cap. Util. % 10/18 Sept. 74.7% 74.8%
NAHB Housing Index 10/18 Oct. 13 14
Housing Starts ,000’s 10/19 Sept. 598 580
Housing Starts MOM% 10/19 Sept. 10.5% -3.0%
Building Permits ,000’s 10/19 Sept. 571 575
Building Permits MOM% 10/19 Sept. 2.1% 0.7%
Initial Claims ,000’s 10/21 16-Oct 462 455
Cont. Claims ,000’s 10/21 9-Oct 4399 4410
Philly Fed Index 10/21 Oct. -0.7 1.8
LEI MOM% 10/21 Sept. 0.3% 0.3%
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source: bloomberg.com