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Aug. 17, 2007 - Overall PPI, CPI outstrip construction in July; lending standards, rates tighten; IP rises

August 17, 2007
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The producer price index (PPI) for finished goods rose 0.6% in July, seasonally adjusted, and 4% over 12 months, the Bureau of Labor Statistics (BLS) reported. The PPI for materials and components for construction climbed 0.2% and 1.9%, respectively. BLS commented, “Price increases for nonferrous wire and cable, cast-iron pressure and soil-pipe fittings, softwood lumber, treated wood, building paper and board, and for paving mixtures and blocks more than offset declining prices for steel mill products, gypsum products, asphalt felts and coatings and fabricated structural metal products.”

In addition, the diesel fuel PPI soared 7% in July, although it was up only 2.5% over 12 months. The PPI for inputs to construction industries, which unlike the materials index includes diesel fuel, climbed 0.7% and 2.8%. Reflecting the relative importance of diesel to different segments, the index for highway and street construction inputs rose 1.3% and 4.1%; other heavy construction, 0.8% and 3.6%; nonresidential buildings, 0.7% and 2.7%; multi-unit residential, 0.4% and 2.7%; and single-unit residential, 0.4% and 2.2%.

The only significant material with a large 12-month price increase was the PPI for hot-rolled bars, plates and structural shapes, up 0.4% in July and 11.4% over 12 months. The biggest decreases were for gypsum products, -3.7% and -20.2%; fabricated iron and steel pipe, tube and fittings, -0.7% and -6.5%; insulation materials, -1.4% and -4%; and asphalt felt and coatings, -1.8% and -0.7%.

The consumer price index (CPI) for all urban consumers was “virtually unchanged” in July, BLS said. The index, which is now published with three-decimal instead of one-decimal precision, rose less than 0.1% for the month, seasonally adjusted, and 2.4% over 12 months.

Since December 2003, when construction materials prices started climbing, the CPI-U has risen 13%. The PPI for construction inputs has climbed 29% and every significant construction input index, except lumber and plywood and insulation materials, has risen more than the CPI (an index commonly used by estimators and budget-setters to project escalation). The CPI for urban wage earners and clerical workers (CPI-W), used to adjust many construction and other union contracts, rose 0.1% in July and 2.3% over 12 months.

“Lending standards for commercial real estate loans were reportedly tightened further over the past three months,” the Federal Reserve reported, summarizing a July survey of senior lending officers at 53 domestic and 20 foreign-owned banking institutions. “About one-fourth of domestic institutions - a slightly smaller net fraction than in the previous survey - and about 40% of foreign institutions indicated that they had tightened lending standards on commercial real estate loans in the July survey.

Regarding demand, approximately one-fourth of domestic and foreign institutions reported that demand for commercial real estate loans had weakened over the past three months.” The Fed made a 50-basis-point cut in the discount rate that it charges banks for short-term loans. So far, there has been no change in the Fed’s target for the federal-funds rate, the rate that banks charge each other for overnight loans. Initial responses to the “question of the week” accompanying the August 10 Data DIGest suggested no impact yet on nonresidential construction from the turmoil in U.S. credit markets.

Industrial production (IP) at mines, utilities and factories climbed 0.3% in July, seasonally adjusted, after rising 0.6% in June, the Fed reported. The 12-month increase was 1.4%. Manufacturing IP was up 0.6% both months and 2% over 12 months. IP of construction supplies fell 0.1% in July after rising 1.2% in June; it fell 1.4% over 12 months. Capacity utilization in manufacturing, which over time can indicate demand for new factory construction, rose to 80.7% in July from 80.3% in June; the long-term average is 79.8%.

Housing starts plunged 6.1% in July, seasonally adjusted, and 21% over 12 months, the government reported. Single-unit starts sank 7.3% and 25%; multi-unit, -1.6% and -0.3%. Building permits, usually a reliable indicator of near-term starts, fell 2.8% and 23%, with single-unit permits down 1.6% and 24%, and multi-unit permits, -6.1% and -19%. On Wednesday, the National Association of Home Builders reported that its index of single-family homebuilders’ sentiment fell in August to the lowest level since January 1991.

“In July, [seasonally adjusted] nonfarm payroll employment increased in 26 states, decreased in 23 states and the District of Columbia, and was unchanged in one state (Wisconsin),” BLS reported. Compared to July 2006, employment increased except in Michigan, -1.5%, and Ohio, -0.03%. The biggest 12-month percentage gains were in Utah, 4.8%; Kansas, 3.6%; Louisiana and Wyoming, 3.4% each; and Montana, 3.3%. Nationally, employment rose 1.4%. Construction employment rose for the month in only 17 states plus DC, fell in 26 and was unchanged (or within 100) in seven. Over 12 months, construction employment rose in 34 states, fell in 13 and was unchanged in three plus DC. The largest 12-month percentage gains were in Utah, 14%; Wyoming, 9%; and Hawaii, 7%. The biggest percentage losses were in Florida, -3%, and Michigan, -10%.

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