Housing starts surge; wholesale prices edge up

By MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON – Housing construction posted a surprisingly large increase in February, bolstered by strength in all parts of the country except the West.
The Commerce Department reported Tuesday that construction of new homes and apartments jumped 22.2 percent in February compared with January, pushing total activity to a seasonally adjusted annual rate of 583,000 units.
While the surge in housing construction was far better than the continued decline economists had expected, experts viewed the rebound as a temporary gain given all the problems the housing industry still faces.
Meanwhile, the Labor Department reported that wholesale prices edged up a slight 0.1 percent in February as a big drop in food costs offset a second monthly increase in energy prices.
After the news, investors restarted Wall Street's rally, buying financial and homebuilder stocks. The Dow Jones industrial average and other major indexes all gained more than 1 percent in mid-afternoon trading.
The protracted housing downturn, rising foreclosures and a deepening U.S. recession have battered homebuilders and scared off many potential buyers. Analysts expect mounting job losses and foreclosures and tightening lending standards to continue to suppress home sales.
"Building permits are indicating that starts could improve modestly in coming months, but we believe the reprieve will be short-lived," Soleil Securities Group analyst Anna Torma wrote in a research note.
Even with the big increase, construction activity remains 47.3 percent below where it was a year ago. The strength in February was led by a sharp gain in apartment construction, which can be highly volatile from month to month.
All areas of the country reported an increase in February, except the West, which has been hardest hit by the housing slump.
Patrick Newport, U.S. economist for IHS Global Insight, said the uptick in construction was driven by improving weather in February, particularly in the Northeast, where a severe winter had slowed construction in December and January.
"The numbers are so low that any increase will give you a big percentage increase," Newport said.
He said a surer sign of a turnaround would be a three-month sustained increase in single-family permits.
"We got several months over the past three years where permits increased only to drop the following month," Newport said.
The 0.1 percent increase in wholesale inflation was much lower than the 0.8 percent surge in January and smaller than the 0.4 percent increase economists had expected. Compared with a year ago, wholesale prices are actually down 1.3 percent.
Core inflation, which excludes energy and food, edged up 0.2 percent in February, only slightly higher than the 0.1 percent gain economists had expected. Core prices had risen 0.4 percent in January.
The world economy remains soft and is getting weaker, making it difficult for companies to raise prices, said Nigel Gault, chief US economist at IHS Global Insight.
"Inflation is clearly very quiet," Gault said. "The risks, if we're looking over the rest of the year, are more toward deflation than inflation, but deflation certainly is not here yet."
Companies are continuing to slash costs.
Caterpillar Inc. on Tuesday announced plans to lay off more than 2,400 employees at five plants in Illinois, Indiana and Georgia as the heavy equipment maker continues to cut costs amid the global economic downturn.
Alcoa became the latest Dow Jones industrial company to lower its dividend to conserve cash. The aluminum maker said it was cutting its quarterly dividend 82 percent to 3 cents. It also said it plans to sell stock and debt to help reduce annual costs by more than $2.4 billion.
Nokia, the world's top mobile phone maker, said it will lay off 1,700 people worldwide to cut costs. The mobile phone market has been suffering as consumers spend less during the recession.
On Wednesday, Fed officials are expected to signal that they will continue to keep a key interest rate at a record low near zero percent for as long as necessary and use other unorthodox means to jump-start the economy.
The Fed has the leeway to focus on the weak economy because inflation pressures are expected to remain law in the face of widespread layoffs that are depressing wage demands.
The 0.1 percent rise in wholesale inflation in February reflected a 1.3 percent increase in energy prices, which have been rising for two months after having retreated for five straight months.
Gasoline prices jumped 8.7 percent in February after a 15 percent surge in January.
Food costs fell for a third straight month, dropping 1.6 percent in February, the biggest one-month decline in three years. The costs of eggs, fruits, vegetables and dairy products were all down.
Outside of food and energy, prices for cigarettes rose 2.7 percent, the biggest increase in two years, while the price of light trucks rose 1.3 percent, a gain that is not expected to last given the weakness in auto sales.
Prices for computers dropped 4.5 percent, the biggest one-month fall since January 2005.
Inflation is not expected be a problem for some time to come given the prolonged recession, which is already the longest downturn in a quarter-century. Overall economic growth fell at an annual rate of 6.2 percent in the October-December quarter and many economists expect the drop in the gross domestic product for the current quarter will be a similarly steep decline.
Many economists say the Fed will not even contemplate interest rate increases until the unemployment rate, which soared to a 25-year high of 8.1 percent in February, declines.
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AP Business Writer Alex Veiga contributed to this report from Los Angeles.