July 21, 2009—New residential construction increased, signaling that the housing market seems to have finally found a bottom. Inflation appears to be in control, but the news on retail sales and industrial production is not as good.

New Residential Construction
Housing starts in June were at a seasonally adjusted annual rate of 582,000. This is 3.6% above the revised May estimate of 562,000, but is 46.0% below the June 2008 rate of 1,078,000. Single-family housing starts in June were at a rate of 470,000, 14.4% above the revised May figure of 411,000. Starts of multi-family buildings with five units or more, however, were just 101,000, down from 143,000 in May. Permits for new housing increased, up 8.7% from May. With low mortgage rates, a $8,000 tax credit available to first-time home buyers, and new, lower-priced homes offered by builders, buyers will slowly begin to reenter the market. However, we are unlikely to see any significant upturn until at least the early part of next year, when the general economy picks up some momentum.

Consumer Price Index
The Consumer Price Index (CPI) rose 0.7% in June after increasing 0.1% in May. June's jump reflected an increase in energy prices (7.4%). Food prices were unchanged. The core CPI, which excludes food and energy prices, also increased 0.2%. Despite the large monthly gain in energy prices, on a year-ago basis, the top-line CPI decreased 1.2% while the core CPI is up 1.7%. The decline in CPI over the past year is the largest since January 1950. Inflation remains in check as consumers and businesses have pulled back on spending.

Producer Price Index
Producer prices for finished goods increased 1.8 % in June, building on May's 0.2% gain. Food prices rose 1.1% in June, after falling 1.6% in May. Energy prices rose 6.6% in June after rising 2.9% in May. Prices for core crude goods increased 2.6%, while prices for core intermediate goods and core finished goods increased 0.4% and 0.5%, respectively.

Industrial Production
Industrial production decreased 0.4% in June after falling 1.2% in May. Utilities posted their first gain (0.8%) since January, but the other components declined. Mining fell 0.5%, manufacturing decreased 0.6%, and motor vehicle production dropped 2.6% for the month. Capacity utilization declined in June to 68.0% from 68.2%. Capacity utilization of manufacturing firms fell to 64.6% from 64.9%. With continued weakness across the economy, we expect industrial production to remain weak this quarter, especially as further production cuts are made at auto manufacturers.

Retail Sales
Retail sales rose 0.6% in June after increasing 0.5% in May. Most categories posted small increases. Sales at gasoline stations (+5.0%) and auto dealerships (+2.6%), posted the largest gains. Without the auto dealer sales, retail sales were up only 0.3%. Core retail sales, excluding autos and gasoline, declined 0.2%. On a year-to-year basis, top-line retail sales decreased 9.0%, while core sales are down 2.9%. Weak sales were reported at food service and drinking places (-0.9%), the building sector (-0.9%), and miscellaneous store retailers (-0.8%), among others. Following unexpected weakness in cores sales in June's report, we expect consumption to remain positive but weak over the remainder of the year.