May U.S. Suffer from Stagflation?

The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated.

Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington. Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

The reports underscore the Fed's dilemma as officials try to prepare investors for an interest-rate increase. Too strong a crackdown on inflation may delay an economic rebound, while waiting too long risks a price outbreak that may need even higher borrowing costs to tame.

The producer-price index jump exceeded the 1 percent forecast among economists surveyed by Bloomberg News. It was the biggest increase since November. The Labor Department's figures also showed that prices rose 0.2 percent excluding food and energy, a measure that matched economists' predictions. Production was expected to increase 0.1 percent.

Housing starts retreated to a 975,000 annual pace. Analysts forecast a decline to 980,000. Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects. Spending on residential projects may continue to be a drag on growth the rest of this year as builders try to work off excess inventories.

Starts decreased in three of four regions, led by a 25 percent drop in the Midwest. Construction fell 10 percent in the West and 4.4 percent in the South. Starts increased 62 percent in the Northeast, led by a rebound in multifamily projects.

Residential construction has subtracted from economic growth every quarter since the first three months of 2006, culminating in a 25.5 percent drop in the first quarter that was the largest since 1981.

Producers paid 7.2 percent more for goods from May 2007, compared with a 6.5 percent gain in the 12 months ended in April. Excluding food and energy, the increase was 3 percent from a year earlier, the same as in the prior month.

Food was 0.8 percent more costly, after no change the previous month. Pork increased by the most since 1999.

Producers paid 9.3 percent more for gasoline, the biggest increase since November, and diesel fuel gained 11.2 percent, the report showed. Natural gas costs were up 5.7 percent from the previous month.

May U.S. Suffer from Stagflation?, Bloomberg
6/17/2008 9:54:31 AM