Housing, Inflation Reports Lift Outlook for Economic Rebound

New U.S. housing starts and permits surged in May from record lows, while producer prices rose at a slower pace despite higher gasoline prices, boosting prospects for the economy's recovery from recession.

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The Commerce Department said on Tuesday housing starts jumped 17.2 percent to a seasonally adjusted annual rate of 532,000 units, as ground-breaking for multifamily units surged 61.7 percent after falling 49.4 percent in April.

A separate report from the Labor Department showed the seasonally adjusted index for prices paid at the farm and factory gate increased by 0.2 percent versus a 0.3 percent April rise. Prices compared with a year ago notched their steepest falls since 1949.

U.S. stock indexes were slightly higher, while Treasury debt prices extended losses and the dollar fell against the euro.

"It's a sign that housing is stabilizing, but it's too early to say that we've seen the bottom. We'd probably need to see several months of stronger sales and better housing starts to give a convincing signal that we're going to see a housing recovery," said Gary Thayer, senior economist at Wells Fargo Advisors in St. Louis.

Housing market data, including new and existing home sales have shown signs of bottoming in the slide, but the surge in mortgages rates following a spike in Treasury debt yields could hamper the sector's recovery.

Benchmark government bond yields jumped to an eight-month high last week on concerns the government's effort to pull the economy out of a 18-month old recession would push the country budget deficit to unsustainable levels and undermine the value of its assets.

The housing market's collapse is the main trigger of the longest U.S. decline in output since the Great Depression. A survey on Monday showed U.S. home builder sentiment eased in June as builders and buyers fretted over rising mortgage costs.

Compared to the same period last year, housing starts dived 45.2 percent. New building permits, which give a sense of future home construction, rose 4.0 percent, the biggest advance since June last year, to 518,000 units in May.

Building completions fell 3.3 percent to 811,000 units, dragged down by single family homes which fell 9.4 percent to a record low 491,000 units. Completions for multifamily units rose 7.7 percent in May.

The slower pace of increase in May producer prices was a relief for investors who of late have been preoccupied with inflation in the wake of the surge in government bond yields.

Compared with the same period last year, producer prices fell 5.0 percent for the largest decline since August 1949, the Labor Department said.

"This is still consistent with inflation being a very moderate risk at this time," said Zach Pandl, economist at Nomura Securities in New York.

Core producer prices, which exclude food and energy costs, dropped 0.1 percent in May compared with a forecast for a 0.1 percent rise, and after a 0.1 percent increase in April. This was the largest decline in monthly core producer prices since October 2006, when they fell 0.5 percent.

In contrast with May 2008, core producer prices stood 3.0 percent higher.

The Labor Department said that a 2.9 percent rise in finished energy goods more than offset a 1.6 percent decline in the index for finished consumer foods for the change in headline producer prices. Gasoline prices rose 13.9 percent.

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