Housing starts jumped 22.2% m/m, to 583k in February, considerably above expectations. The increase was driven by an 82.3% surge in multi-family starts to 226k that was well beyond expectations for a modest rise and completely offset the decline over the previous three months. Single-family starts rose a much more modest 1.1%, to 357k. The increase in activity was concentrated in the Northeast, where starts jumped 89%. They also rose 59% in the Midwest and 30% in the South but fell 25% in the West. The decline in the West seems logical, given the huge overhang of foreclosed homes on the market, but the increases in other regions were surprising.

Building permits rose 3.0% m/m, to 547k, bringing the level of permits below starts. Single-family permits rose 11%, suggesting the possible emergence of a bottom in construction. Starts of single-family homes are down 80% from the peak and running below the pace of new home sales. Multi-family permits fell 11%, suggesting that part of the gain in multi-family starts in February will be reversed over the next few months. Permits jumped 28% in the Northeast and increased 6% in the South.

Bottom line: The unexpected gain in housing starts was largely driven by a surge in multi-family construction, which is notoriously volatile on a monthly basis. We believe the more telling sign is that single-family permits increased for the first time in nine months. This is consistent with market forecast for starts to reach a bottom early this summer.

US producer prices rose for the second straight month in February; no evidence of near-term core deflation

Headline US producer prices rose 0.1% m/m in February following a 0.8% jump the prior month, below expectations. The core PPI climbed 0.2% m/m, in line with market expectations. Today’s report provides further evidence against near-term core deflation; core prices are either declining less rapidly or increasing at all stages of processing: core finished goods prices were up 0.2% m/m (last: 0.4%), core intermediate prices fell 0.6% m/m (last: -1.1%), and core crude prices jumped 1.5% m/m (last: 0.1%). Given the rising slack in the global economy, however, we expect a gradual weakening in core inflation in the coming months. On a y/y basis, the PPI fell 1.3% in February after a 1.0% decline in January, while the core PPI moderated to a 4.0% pace from 4.2%.

As we had expected, the PPI for retail gasoline (seasonally adjusted) soared for a second straight month (8.7% m/m versus 15.0% m/m in January), but other energy prices declined a bit faster than we had expected: residential gas fell 3.6% m/m, while home heating oil dropped 7.2% m/m. Food prices were also quite weak: the PPI for finished consumer foods decreased 1.6% m/m following a more subdued 0.4% decline in January. The 0.2% rise in the core was fairly broad based across categories, including light trucks (1.3%), tobacco (2.7%), alcoholic beverages (1.2%), household appliances (1.5%), apparel (women’s: 1.3%, men’s: 0.2%), and pet food (1.5%). The strength in tobacco prices most likely reflects producers’ raising wholesale and retail prices ahead of an anticipated excise tax increase in April; we also expect this to show through in the CPI, though the timing may differ.