U.S. PPI Decline Yr-to-Yr Matches'49 Record; Core Pricing Power Evaporates

Though housing starts posted a gain last month, the rise was modest and it suggests that the U.S. housing sector remains under pressure. Total housing starts recovered from their April decline with a 17.2% m/m rise to 532,000 (AR) units. The May figure was firmer than Consensus expectations for 485,000 starts. However, despite the surprise starts remained down by nearly one-half from one year ago. The best that can be noted is that a further decline has not occurred and starts have been flat during 2009.

Starts of single-family homes posted their third consecutive monthly increase. Regardless, single-family starts remained near the record low for the series which dates back to 1959 and the latest level was down three-quarters since the peak in early-2006. During the last ten years, there has been an 84% correlation between the q/q change in single-family starts and their contribution to quarterly GDP growth.

Starts of multi-family homes rose by nearly two-thirds m/m to 131,000. Nevertheless, the increase failed to make up an April decline and starts of apartments, condominiums & town houses remained down by nearly half from May of last year and starts were off two-thirds from the 2006 peak.

By region, starts of single-family units last month showed broad-based gains. Single-family starts in the Midwest rose 9.4% to their highest level since November (-38.1% y/y). In the South, single-family starts made up the decline of the previous two months with a 10.6% increase off the record low (-42.4% y/y). In the West starts rose for the third straight month (-36.2% y/y). Countering these monthly increases was another decline in the Northeast which was the second in a row (-47.8% y/y).

The latest level of building permits remained near the record low last month. The 4.0% increase did not make up for declines during the prior two months and, overall, permits were down by roughly one-half from last May. Single-family home permits, a leading indicator of starts, however, ticked up 3.6% from March (-42.3% y/y).

The housing starts figures can be found in Haver's USECON database.

The Federal Reserve reported that the earlier letup in the factory sector recession was short-lived. Output, which includes mining and utilities, declined a greater-than-expected 1.1% last month following a 0.7% April drop that was larger than reported initially. During the last three months, output is off at a 13.7% rate, and off 13.5% in the last twelve, the sharpest drop y/y since 1946.

Output of consumer goods overall fell 0.9% (-7.2% y/y) and the declines were broad-based. Production of autos fell another 5.3%, though the year-to-year decline eased to -29.0%. Furniture, appliance & carpeting output continued to reflect the weakness in the housing market and posted a 1.1% drop (-20.8% y/y) while apparel output slipped 0.3% (-10.6% y/y). In the capital goods sector, there's been no letup in output's rate of decline. Production of business equipment fell 1.4% last month and the three-month rate of change stands at -21.5% (AR), nearly the worst of this downturn. Finally, the downturn in the housing market continued to exact its toll on the output off construction supplies. It fell 1.0% and at a 19.2 rate during the last three months.

The high-tech sector continued to suffer. Industrial production here fell 1.9% last month but at a reduced 5.5% rate during the last three. Less high tech, overall industrial production fell 0.8% last month and the annual rate of change eased to -13.6%.

Excess capacity grew even further last month. Capacity utilization fell to 68.3%, a record low for the series which dates to 1966. Utilization in the factory sector dropped even harder to 65.0% from a peak near 80% back in 2007. The latest, again, was the lowest since WWII.

The industrial production data are available in Haver's USECON database.

Optimists regarding the outlook for the next six months among German financial market professionals outweighed pessimists by 44.8% in June according to the latest ZEW Survey (The Mannheim based Center for European Economic Research). This represented an increase of 13.7 percentage points from May and was the largest margin of optimists since June 2006. It was also well above the long term average of 26.3%. The financial professionals also saw some slight improvement in current conditions. The percent balance between pessimists and optimists declined from 92.9%in May to 89.7% in June. The first chart shows the ZEW appraisals of current conditions and expectation for the next six months.

A part of the group's more optimistic appraisal of the outlook can be attributed to their expectations of profit increases in both the banking and insurance industries, as shown in the second chart. Expectations of profits in the banking industry have risen from 2.0% in April to 30.8% in June, and in the insurance industry from 5.1% in May to 9.7% in June. Except for a 5.4% increase in Utilities' profits and virtually no change in Information Technology profits, expectations for all the other industry are still negative, although less so.

Speculation that the U.S. economic recovery is taking hold drove regular gasoline prices even higher last week to an average $2.67 per gallon of regular. Gasoline prices now have risen more than $1.00 per gallon, or by more than one-half, from the December low to the highest level since late-October. Yesterday, the cash market price for a gallon of regular gas rose further to $2.02 per gallon versus $1.96 averaged last week. These also were the highest prices since last October. The figures are reported by the U.S. Department of Energy and can be found in Haver's WEEKLY & DAILY databases.

Evidence that the economic rebound is finally taking hold may be evidenced in the figures for vehicle-miles driven. The year-to-year change in miles driven still is negative, but the y/y change of -0.7% is the least since March and is well improved from the -5% comparisons of this past fall. The change in demand is measured using the latest four weeks versus the same four weeks in 2008. Demand for all petroleum products was down 6.9% y/y in the latest week led by a 19.7% drop in demand for residual fuel oil and a 12.8% drop in distillate demand. These numbers are available in Haver's OILWKLY database.

Higher crude oil prices are behind the rise in gasoline costs. Crude prices averaged $70.83 last week for a barrel of West Texas Intermediate, up from the December low of $32.37 per barrel. Yesterday, crude oil prices held steady at $70.62 and prices reached a high of $145.66 last July. The latest price increases occurred despite a 3.9% year-to-year rise in crude oil production during the latest four weeks. Further more, they have occurred despite a 13.7% y/y rise in inventories of crude oil & petroleum products. The figures on crude oil production and inventories are available in Haver's OILWKLY database.

Finally, the gains in the price of natural gas paused again last week and it fell back to $3.56 per mmbtu (-71.8% y/y). The latest price was nearly the lowest since 2002 and is down by two-thirds from the high reached in early-July of $13.19/mmbtu.

Economic and Environmental Impacts of U.S. Corn Ethanol Production and Use from the Federal Reserve Bank of St. Louis is available here.