Groundbreaking on new US homes shot up by a seven-year high of 11.6 percent in May, the government said Tuesday, quelling fears consumer spending was flagging.
It was the steepest rise in housing starts since July 1995, easily beating Wall Street's forecast for an increase of 1.9 percent.
"Unlike other data that softened in May, housing activity strengthened. In our view, that suggests that the slowdown in retail sales in May was temporary," Merrill Lynch economist Bruce Steinberg said.
"Falling mortgage rates should keep housing activity robust," Steinberg said, noting that mortgage applications for home purchases had run at a record pace during the past month.
"Residential construction will make a sizeable positive contribution to second-quarter growth," he forecast.
Doubts about consumer spending -- accounting for two-thirds of US activity -- crept into the markets last week when the government said retail sales took a surprising 0.9 percent drop in May.
Those fears were fed when the University of Michigan consumer sentiment index for early June slumped.
Consumers have served as an engine of the US economic recovery, maintaining spending power even in the months after the Sept. 11 attacks on New York and Washington.
But with business investment still the key missing ingredient of the recovery, any weakening in consumer spending would cast doubt over the sustainability of the upturn.
"After the retail sales number and drop of the confidence index of the University of Michigan for June, the big jump in housing starts shows consumer spending is still there and still responsive to low interest rates," Wachovia Securities chief economist John Silvia said.
* Home-building rose 11.6 percent in May, to reach a seven-year high.
* The rise, the steepest since July 1995, was well ahead of Wall Street's expected rise of 1.9 persent.
* Economists attribute the increase to falling mortgage rates, as mortgage applications for home purchases ran at a record rate during the past month.
* The figures have calmed some analysts, who have been concerned that consumer confidence may be weakening, threateining the recovery.
Housing starts, which leapt to a seasonally adjusted annual rate of 1.733 million units in May, were strong in all major US regions, he said, lowering the likelihood of a return to US recession.
"It is encouraging," Silvia said.
"There is no risk of a double dip. It is a modest recovery, very similar to 1991-93 -- sort of a `stealth recovery'; you don't really see it but it is there."
RSS