Housing Starts Jump in May, PPI Tamer than Expected

Tuesday presented some good news for the real estate market as Housing Starts improved above expectations in May. Inflation for producers was also more benign than expected. Together, the two releases are allowing futures to extend overnight gains.

S&P 500 futures are now up 0.5%, compared to just +0.2% before the 8:30 releases. The boost may help the stock index recover from its 2.4% fall on Monday ― the biggest single-day drop in a month.

The Housing Starts report showed a 17.2% monthly advance to an annual pace of 517k in May. This is the third month of improvement and puts the index at its highest level since November.

The only negative item to add is that April’s figures were revised downwards from 458k ― already an all-time low ― to 454k. 

Single-family housing starts improved 7.5% in May to 401k, while the pace of construction for buildings with five or more units was 124k, more than double the 70k pace in April.

Building Permits also increased in May, moving up 4.0% overall to a pace of 498k. On a year-to-year basis, the number of new permits is down 47%.

Permits for single-family units saw a 7.9% gain 408k, while permits for buildings with five or more units fell 10k to 92k in May. 

Robert Kavcic of BMO Capital Markets called the rise in permits “a positive indication” for the months ahead.

“U.S. residential construction remains very weak, but continued stability in single-family units is positive,” he added. “Additionally, while homebuilder confidence edged down slightly in June, the upswing off of January’s record low also hints of some stability in the U.S. housing market.”

Meanwhile, prices were moderating more than anticipated in May, and once energy and food items are excluded deflation even set in for the month, according to the Producer Price Index put out by the Bureau of Labor Statistics.

On a month to month basis, producer prices gained 0.2% in May, quite a bit lower than the +0.6% consensus expectation. The small gain follows a 0.3% advance in April and a fall of 1.2% in March.

Core prices, which exclude volatile food and energy components, actually decreased 0.1% in the month, in contrast to wide expectations of a +0.1% print. The negative figure follows a 0.1% gain in April.

“In May, a 2.9-percent increase in finished energy goods prices more than offset a 1.6-percent decline in the index for finished consumer foods and a 0.1-percent decrease in prices for finished goods other than foods and energy,” the government report said.

Charmaine Buskas, senior strategist at TD Securities, noted that core prices were up 3.0% compared to last year, marking the softest pace of advance since June 2008.

“Energy prices remain a key support for headline prices of all stages, but once this is stripped out core prices appear quite soft,” she added. “Moreover, on a trend basis, producer price inflation remains soft reflecting weakened demand.”