The U.S. economy appears to be enjoying inflation-free growth, lifting the spirits of investors who have been made skittish by geopolitical dramas in eastern Europe and the Middle East.
Builders started work on houses at an annual rate of more than 1.09 million in July, a 15.7-per-cent surge from the previous month and the second-fastest rate since early 2008, according to Royal Bank of Scotland. A separate report Tuesday showed the consumer price index increased 2 per cent from July, 2013, compared with an annual gain of 2.1 per cent in June.
For investors, the reports provided a double dose of reassurance that their heavy bets this year on U.S. equities remained good ones. The rebound in the housing market levelled off earlier this year, raising concerns that a major engine of the U.S. economy was losing power. Milder inflation, meanwhile, suggests the U.S. Federal Reserve will face less pressure to raise its benchmark lending rate to get ahead of a spike in prices.
“Today’s report confirms that fears surrounding a sharp increase in inflationary pressures, which would in turn force the Federal Reserve’s hand into an earlier start to the hiking cycle, appear to be unfounded,” Francis Fong, a senior economist at Toronto-Dominion Bank, said in a note to clients. Analysts at Barclays Capital in New York said the latest housing numbers showed the “moderate recovery in housing activity is back on track after the disruption in recent months caused by higher mortgage rates and adverse winter weather.”
The Standard & Poor’s 500 index climbed toward its all-time high, as the positive economic news outweighed any concern over the collapse of the ceasefire between Israel and Palestinian militants in the Gaza Strip. The S&P 500 was about 0.5 per cent higher near the end of the trading day and the Dow Jones industrial average also was about 0.5 per cent higher.
Economic indicators mostly have been strong since exceptionally frigid and snowy weather caused U.S. gross domestic product to contract in the first quarter. The Fed’s policy-making committee said at its meeting last month that economic growth “rebounded” in the second quarter, although it expressed reservations about a “slow” recovery in housing. The Federal Open Market Committee also dropped language that suggested policy makers were worried that prices were rising too slowly, risking deflation.
Energy prices eased in July, while food prices jumped. Excluding those two volatile components, the CPI last month gained 1.9 per cent from a year earlier, the same annual gain as occurred in June, according to the U.S. Labour Department.
The so-called core rate of inflation accelerated markedly in March, April and May, sparking commentary that the Fed was losing its grip on inflation. The annual increase in the core CPI slowed in June and now appears to have stalled in July. That supports Fed Chair Janet Yellen’s contention that the jump in inflation earlier this year would be temporary.
Housing starts have continued to be plagued by weather, as June was one of the wettest months on record. As construction sites dried, building accelerated from an annual rate of 954,000 new starts in June. The July increase was led by apartment and condominium buildings, which surged almost 30 per cent, while crews started work on single-family homes at an annual rate of 656,000, an increase of 8.3 per cent from June, according to the Commerce Department.
While improved, the U.S. housing market still is struggling to regain its precrisis momentum. Builders started work on only 554,000 units in 2009 and they managed 924,900 starts in 2013. But in 2000, housing starts numbered 1.6 million, and climbed as high as 2.1 million in 2005. Before the Great Recession, the U.S. had not posted fewer than one million annual housing starts, according to government records that date to 1959.
There is reason to think the U.S. may finally return to that level this year. The Commerce Department also reported Tuesday that building permits increased 8.1 per cent in July to an annualized 1.05 million, the highest level since April and indicative of growing demand for housing.