US economic data point to soft landing

US economic data point to soft landing
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: February 16 2007 14:21 | Last updated: February 16 2007 14:21


US inflation pressures eased while construction activity fell to a 10-year low in a sign that the economy is heading for a soft landing, according to fresh government figures published on Friday.

Wholesale inflation eased as the producer prices index fell 0.6 per cent, while core inflation excluding volatile food and energy prices rose 0.2 per cent, in line with expectations.

The moderating inflation picture is consistent with the economic outlook sketched out by Ben Bernanke this week when the Federal Reserve chairman appeared testified before Congress.

Mr Bernanke said the price pressures were easing but core inflation remained “somewhat elevated” as he pointed to interest rates on hold for many months.

The drop in housing activity was much sharper than economists were expecting but is likely to be seen as a welcome sign by the Fed that new construction is slowing as housebuilders sell off excess inventory.

Construction activity began on 1.4m homes last month, down from 1.64m in December. There were also signs of further weakness ahead as applications for building permits fell to 1.57m from 1.61m.

Jeoff Hall, an economist at Thomson Financial, said: “Homebuilders are starting to feel better about the ability to clear excess inventory. I don’t think they’re ready to start building again yet. But the sentiment is improving and that will be apparent later in the year.”

Gary Bigg, an economist at Bank of America, said the figures pointed to stabilisation in the construction sector and suggested “that demand is leveling off” with cooling in the overheated South and West and a rally in the Northeast and Midwest.

The 14 per cent drop in housing starts prompted markets to price in a small chance of interest rates being cut in the first half of this year, with futures traders assuming a 16 per cent chance that the Fed would be forced to cut.