Economic Indicators On The Up - Fears Overblown

The Bank of Japan on Tuesday upgraded its assessment of the economy for the second straight month, encouraged by signs that the worst of the economic downturn may be over. The BOJ board also voted unanimously to keep the unsecured overnight call loan rate unchanged at 0.10% while it gauges the effectiveness of previous measures. The board last lowered the policy interest rate in December by 20 basis points.

Following its May meeting, when the BOJ raised its economic assessment for the first time since July 2006, the central bank confirmed Tuesday that the economy has continued moving toward recovery over the past month.

"Japan's economic conditions, after deteriorating significantly, have begun to stop worsening," the central bank said in a statement released together with the rate decision.

In May, the BOJ said "exports and production are beginning to level out," though economic conditions have been deteriorating. Still, economic upgrades alone don't necessarily mean the bank will change its easy monetary policy anytime soon, as economic conditions remain on the weaker side. Market participants are waiting for a news conference by BOJ Governor Masaaki Shirakawa for more details on the bank's outlook and whether or not its policy stance may change down the road.

WASHINGTON -- Home construction climbed in May far above expectations, with single-family starts rising a third month in a row and giving more evidence of stability in the housing sector.

Separately, U.S. producer prices posted their largest annual decline in 60 years last month, suggesting that the prolonged recession continues to take pressure off inflation.

Housing starts increased 17.2% to a seasonally adjusted 532,000 annual rate compared to the prior month, the Commerce Department said Tuesday. Building permits rose; apartment construction surged. The 17.2% increase was much bigger than expected. Economists surveyed by Dow Jones Newswires forecast a 7.0% increase to an annual rate of 490,000.

Toll Brothers Inc. recently reported its fiscal second-quarter loss narrowed a little. The nation's largest builder of luxury homes posted a loss of $83.2 million, compared with a year-earlier loss of $93.7 million. It recorded smaller write-downs. The company operates in 21 states and last reported a profit nearly two years ago. Toll Brothers said it expects to deliver between 2,200 and 2,800 homes during the year, compared with an earlier, March view of 2,000 to 3,000 homes.

Tuesday's report on housing showed building permits in May increased 4.0% to a 518,000 annual rate. Economists had expected permits to rise by 2.4% to a rate of 510,000. April permits fell 2.5% to 498,000. But the problems of the housing sector are not over. Inventories are way too high, in relation to new-home sales, a key measure indicates. The ratio of those for sale to property sold in April exceeded 10 months.

Layoffs and tight credit are holding back sales. And mortgage rates have started rising, pushed by rising government bond yields. Investors are concerned about inflation because of increased spending in Washington meant to pull the economy out of recession. Freddie Mac data showed the average on a 30-year mortgage loan was 5.59% last week -- 73 basis points higher than the average four weeks earlier of 4.86%, an advance that could hurt demand for houses.

A report Monday indicated builder confidence faltered in June, after going up two straight months. The National Association of Home Builders index on builder confidence in sales of new, single-family houses fell to 15 from 16 in May. "The issues in the housing market are going to take some time to play out and won't reverse nearly as soon as some would like," Dan Greenhaus, a bond market analyst at Miller, Tabak & Co. in New York, said in reaction to the NAHB report.

Tuesday's data said starts in April dropped by 12.9% to 454,000; originally, Commerce reported April starts fell 12.8% to 458,000. Year over year, housing starts were 45.2% lower than the pace of construction in May 2008. Single-family starts climbed 7.5% to 401,000, after rising 3.3% in April and 1.1% during March. Construction of housing with two or more units jumped 61.7% to 131,000; within that category, groundbreakings of homes with five or more units -- or multifamily -- were 77.1% higher. Regionally, housing starts climbed 16.8% in the South, 2.0% in the Northeast, 11.1% in the Midwest, and 28.6% in the West. Nationwide, an estimated 51,200 houses were actually started in May, based on figures not seasonally adjusted. An estimated 48,100 building permits were issued last month, also based on unadjusted figures.

German economic expectations in June rose to 44.8 from 31.1 a month earlier and experts predict a recovery will start by year-end, the Center for European Economic Research said Tuesday. It was the highest reading since May 2006. Economists in a Dow Jones Newswires consensus forecast had expected a reading of 37.0. The center, also known as ZEW, after its German initials, said the increase showed that economic optimism is becoming entrenched.

"The assessment of the experts indicates that the economic downturn dynamics are currently coming to rest. They further see tendencies for a recovery at the end of this year," said the president of ZEW, Wolfgang Franz, who also heads the council of economic advisers to the government.

Survey participants also revised their assessments of the current situation, which in June rose to -89.7 from -92.8 the month earlier, the center said.

"What we see now for the first time (in a while) is that also the assessment of the current situation is improving," said ZEW economist Peter Westerheide.

In tandem with the economy, many of the 271 survey respondents expect inflation to return. Prices in Germany were mostly unchanged last month on an annual basis, official data showed recently. "A deflation scenario is not really on the horizon," as of now, Mr. Westerheide said. "Just a small minority of respondents" sees further downside price pressures, he added.

The experts also expect the European Central Bank, which sets interest rates for the 16 countries using the euro, to hold its policy rate steady at 1% over the next six months. ZEW's survey also showed that expectations rose across a number of industrial sectors. The more optimistic assessment was most prevalent in banking and investment products, Mr. Westerheide said.

WASHINGTON - The U.S. economy is healing faster than anticipated but still at an anemic pace that's unlikely to soon produce either jobs or inflation, according to the International Monetary Fund. In its annual review of the U.S., the IMF forecast that the U.S. economy would contract by 2.5% this year, compared with the 2.8% decline the IMF predicted in April. For 2010, the IMF forecasts the U.S. will grow 0.75%, rather than the zero growth it predicted two months ago.

The IMF said the U.S. was benefiting from monetary and fiscal stimulus, and from some improved stability in the financial markets. The tepid growth rate was likely to keep inflation in check in the short term, with the consumer price index expected to decrease 0.5% in 2009 and increase 1% next year, the IMF forecast.

John Lipsky, the IMF's deputy managing director, interpreted the recent increase in Treasury bond yields as a positive sign. He said the rise reflected "the effectiveness of policy in reducing fears of really serious negative outcomes," and an increased willingness of investors to search out riskier investments.

Longer term, the IMF said, the U.S. needed to "develop and communicate" a strategy for withdrawing monetary stimulus and fiscal stimulus. Otherwise, such stimulus "may stoke concerns about inflation and rising debt, exerting upward pressure on interest rates."

But the IMF advised the U.S. to start cutting back only after a "sustainable recovery is under way." The IMF didn't expect that to occur shortly.

Mr. Lipsky said the IMF didn't expect U.S. unemployment to stop rising until the second half of 2010, even if the U.S. economy grows somewhat before then. The IMF also warned that U.S. debt may rise to 75% of gross domestic product by 2011, nearly twice what it was in 2008 -- and higher than the 70% of GDP forecast by the White House.

"Looking forward, such a rise in debt may put significant pressure on Treasury bond rates," the IMF said.

Calling the administration's economic assumptions "relatively optimistic," the IMF said the U.S. needed to cut spending or boost revenue by an additional 3.5% of GDP through 2019 to keep to the debt levels sought by the White House -- 70% of GDP in 2019.

The IMF laid out a number of possibilities for boosting revenues, including reducing the deductibility of interest on corporate debt and on household mortgages, and raising energy taxes. Any one of those proposals would be a tough political sell in Congress. The U.S. Treasury, in a statement Monday, said the analysis reflected the IMF's "independent judgment" of the U.S. economy, and that the U.S. supported its public release. The statement didn't comment on the specifics of the analysis by the IMF.

p/s photo: Elanne Kong Yuk Lam