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Home Builders Report Optimism But Nonresidential Markets Stay Soft

June 17, 2003
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"Builder expectations for future home sales are now even more buoyant than early in the year," National Assn. of Home Builders President Kent Conine after releasing NAHB's latest Housing Market Index.

The index, based on a monthly survey of home builders, rose to 62 in June from 57 in May, where any reading over 50 indicates that more builders rate sales conditions as good than poor. Helping builders' mood is a continued drop in mortgage rates, which fell another 5 basis points last week, according to Freddie Mac's weekly survey.

Business conditions remain generally soft, according to the "Beige Book," the latest survey conducted by the 12 Federal Reserve Banks and completed before June 2. Although reports indicated "some signs of increased economic activity in April and May, conditions remained sluggish in most Districts. No District report suggested that economic conditions had deteriorated since the last Beige Book.

"Economic activity increased or showed signs of improving in the Dallas, Kansas City, New York, and Minneapolis Districts. The Philadelphia and Cleveland reports characterized activity as mixed, while other Districts generally saw sluggish, subpar, or subdued economic growth. The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggested that the effect has not been dramatic."

Regarding nonresidential real estate and construction, the survey found, "Overall commercial real estate continues to be weak, with only scattered indications of conditions stabilizing at a low level. The Boston District has seen high and rising office vacancy rates and falling rents. Office vacancy rates have also edged up in suburban Philadelphia. Nonetheless, both Districts reported an increase in purchases of office buildings by institutional investors and real estate investment firms.

"New York's office market has shown signs of improving recently, after having weakened in the first quarter. Brisk leasing activity in Lower Manhattan -- largely from the health sector -- pushed that area's vacancy rate down sharply to its lowest level in one year.

Commercial leasing and construction activity in the Richmond District was generally flat in recent weeks, but the retail sector was one of the bright spots in recent weeks."

The producer price index (PPI) for finished goods, seasonally adjusted, dropped 0.3% in May on the heels of a 1.9% decrease in April, the Bureau of Labor Statistics (BLS) reported. The "core" PPI, omitting wholesale food and energy costs, rose 0.1% after sliding 0.9% in April.

Compared to a year ago the PPI is up 2.5%. Among intermediate-goods PPIs, BLS reported that "The index for materials and components for construction edged up 0.1% in May, following a 0.2% gain in the prior month.

In May, increasing prices for asphalt felts and coatings, architectural coatings, nonferrous wire and cable, concrete products, and hardwood lumber outweighed decreasing prices for plastic construction products, treated wood, steel mill products, fabricated structural metal products, and paving mixtures and blocks." This index is up 1.1% over the past 12 months.

Among crude-materials indexes, the PPI for construction materials was down 0.2% in May, down 1.1% in April, and down 1.2% over 12 months. The PPI for construction machinery and equipment rose 0.2% in May, 0.1% in April, and 1.5% from May 2002 to May 2003.

Reprinted with the permission of the AGC.

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