Consumer Prices Probably Fell in January: U.S. Economy Preview

By Shobhana Chandra

Feb. 16 (Bloomberg) -- Consumer prices in the U.S. probably posted their first annual decline since 1955 and new home construction fell further in January, economists said before reports this week.

The cost of living probably dropped 0.1 percent in the 12 months to January, according to the median forecast in a Bloomberg News survey ahead of Labor Department figures due on Feb. 20. A Commerce Department report two days earlier may show builders broke ground on the fewest houses since record-keeping began in 1959, a separate survey indicated.

The Labor report may renew concern among some Federal Reserve officials about the risk of prolonged declines in prices, which erode profits and make debts harder to repay. The housing figures will underscore the difficulty President Barack Obama will have in arresting the industry’s three-year slump.

“Given the rising odds of deflation, there’s certainly no pressure on the Fed to raise rates and it gives them the green light for further credit easing,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. Meantime, housing is unlikely to recover in the first half of the year, he said.

Obama will unveil his strategy to stem the mortgage crisis the same day as the housing-starts figures. The focus of the plan will be to cut monthly payments to help keep struggling borrowers in their homes, aides said.

Summers Warning

Lawrence Summers, director of the White House’s National Economic Council, said last week it will take a while for the $787 billion fiscal stimulus and a financial-rescue plan to have an impact, warning that the economy’s slump will probably continue “for some time.”

Summers also signaled, in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” that the administration is open to spending more than the $50 billion allocated so far to aid the mortgage market.

The Standard & Poor’s 500 Supercomposite Homebuilding Index lost 11 percent last week. Centex Corp., the second-biggest American homebuilder, dropped 23 percent to $8.54.

Builders are under pressure as a glut of available homes depresses the housing market. The Commerce report may show that new-home starts in January dropped to a 530,000 annual rate, according to the Bloomberg survey. Permits, a sign of future construction, probably also declined to a record low.

Taking a Toll

Toll Brothers, the largest U.S. luxury homebuilder, said last week that first-quarter revenue plunged 51 percent.

“The past five months have been among the most difficult in U.S. economic history,” Chief Executive Officer Robert Toll said during a Feb. 11 conference call.

A deepening recession has forced retailers from Macy’s Inc. to AnnTaylor Stores Corp. and Kohl’s Corp. to offer discounts of as much as 70 percent to clear out merchandise.

The Labor report may show that the overall cost of living climbed 0.3 percent in January from December, the first gain in six months, according to economists surveyed. The average cost of regular gasoline rose 10 cents to $1.79 a gallon last month from December, according to AAA. Core consumer prices, excluding food and fuel, likely rose 0.1 percent after no change in December.

Labor’s report on producer prices, scheduled for Feb. 19, may show wholesale prices fell 2.5 percent last month from a year earlier, according to the Bloomberg survey median.

Deflation Risk

Economists are worried the deceleration in prices, or disinflation, may lead to outright deflation. The level of Fed policy makers’ concern about the economic downturn and its pressure on prices will be reflected in minutes of their January meeting, due on Feb. 18.

“Excess economic slack is posing a significant risk of deflation,” Deutsche Bank Securities Inc. economists Joe LaVorgna and Carl Riccadonna in New York wrote in a Feb. 13 report. “Inflation could fall to uncomfortably low levels.”

A Fed report on Feb. 18 may show industrial production fell 1.5 percent in January, the fifth drop in six months, according to another Bloomberg survey. The slump in manufacturing may also be highlighted in Fed reports from the New York region, due on Feb. 17, and the Philadelphia area two days later.

Automakers General Motors Corp. and Ford Motor Co. are slashing production and jobs, and Caterpillar Inc., the world’s largest maker of bulldozers, is scaling back.

Among other reports this week, the Conference Board’s index of leading economic indicators was likely unchanged in January after a 0.3 percent gain, economists predict. The gauge, which points to the direction of the economy, is due on Feb. 19.

                         Bloomberg Survey

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Release Period Prior Median Indicator Date Value Forecast ================================================================= ============== Empire Manu. Index 2/17 Feb. -22.2 -23.8 Net Long Term TICS $ Bl 2/17 Dec. -21.7 20.0 Total TICS $ Blns 2/17 Dec. 56.8 30.0 NAHB Housing Index 2/17 Feb. 8 8 ABC Conf Index 2/17 Feb. 16 -53 -53 MBA Mortgage Applic 2/18 Feb. 14 -24.5% n/a Import Prices MOM% 2/18 Jan. -4.2% -1.0% Import Prices YOY% 2/18 Jan. -9.3% -11.2% Housing Starts ,000’s 2/18 Jan. 550 530 Building Permits ,000’s 2/18 Jan. 547 525 Ind. Prod. MOM% 2/18 Jan. -2.0% -1.5% Cap. Util. % 2/18 Jan. 73.6% 72.4% PPI MOM% 2/19 Jan. -1.9% 0.2% Core PPI MOM% 2/19 Jan. 0.2% 0.1% PPI YOY% 2/19 Jan. -0.9% -2.5% Core PPI YOY% 2/19 Jan. 4.3% 3.8% Initial Claims ,000’s 2/19 Feb. 7 623 620 Cont. Claims ,000’s 2/19 Jan. 31 4810 4818 LEI MOM% 2/19 Jan. 0.3% 0.0% Philly Fed Index 2/19 Feb. -24.3 -25.0 CPI MOM% 2/20 Jan. -0.7% 0.3% Core CPI MOM% 2/20 Jan. 0.0% 0.1% CPI YOY% 2/20 Jan. 0.1% -0.1% Core CPI YOY% 2/20 Jan. 1.8% 1.5% Core CPI SA Index 2/20 Jan. 216.816 n/a CPI NSA Index 2/20 Jan. 210.228 211.081 ================================================================= ==============

To contact the reporter on this story:
Shobhana Chandra in Washington at
schandra1@bloomberg.net