House construction falters in May, but remains at reasonable level

The Associated Press
Wednesday June 20, 2001

WASHINGTON — Housing construction dipped in May but remains at a healthy level, further evidence of the industry’s resilience in the face of a faltering national economy. 

The number of new housing units builders began work on last month dipped by 0.4 percent to a seasonally adjusted annual rate of 1.62 million, following a strong 2.3 percent increase in April, the Commerce Department reported Tuesday. 

Even with May’s decline, which was smaller than many analysts were expecting, the level of housing starts remained solid, economists said. 

“Things are still cooking along,” said David Seiders, chief economist at the National Association of Home Builders. Taking a look at quarterly patterns, however, construction activity appears to be flattening, he said. 

“For builders, flattening at this level is just dandy, but for the economy, construction activity going forward might not provide as much of a kick to economic growth as it has,” Seiders said. 

On Wall Street, unease about weak company profits ruled the market. The Dow Jones industrial average closed down 48.71 at 10,596.67, despite an earlier gain of 94 points. 

Even as the rest of the economy has slowed markedly since the second half of last year, housing activity has remained stable, thanks to low mortgage rates and falling interest rates in general. 

In May, the average rate on a 30-year fixed-rate mortgage was 7.14 percent, compared with 8.52 percent for the same month a year ago. 

The strength of the housing and construction markets has been a main force keeping the struggling economy afloat. 

“Housing ... is clearly providing a shield against full-fledged recession, rather like a levee protecting against the rising flood of manufacturing layoffs and stock market declines,” said First Union chief economist David Orr. 

To stave off recession, the Federal Reserve has slashed interest rates five times this year, driving borrowing costs down to the lowest point in seven years. 

Many analysts believe Fed policy-makers will cut rates again at the end of their two-day meeting June 27. Some predict policy-makers will cut by another half point, while others believe they will opt for a more moderate quarter-point move. 

In May, construction of single-family homes slipped by 0.2 percent to an annual rate of 1.29 million. Starts of apartments, condos, townhouses and other multifamily housing fell by 1.5 percent to a rate of 331,000. 

By region, total housing starts declined by 28.3 percent in the Northeast to a seasonally adjusted annual rate of 132,000 and were down by 1.9 percent in the South to a rate of 724,000. But in the Midwest, starts rose by 15.8 percent to a rate of 344,000, and in the West they increased 2.9 percent to a rate of 422,000. 

Housing permits, a good barometer of current demand, rose by 2.1 percent in May to an annual rate of 1.62 million. 

While consumer spending, which accounts for two-thirds of all economic activity, has held up fairly well during the economic slowdown, some analysts worry that could change if the labor market seriously weakens in the coming months. That could force consumers to sharply cut back on spending, tipping the economy into recession. 

Even with this fear, other economists are hopeful that aggressive rate-cutting by the Fed, along with tax-cut refunds, will pave the way for a recovery later this year. 

On the Net: 

Housing starts: http://www.census.gov/cgi-bin/briefroom/BriefRm 

National Association of Home Builders: http://www.nahb.com/