WASHINGTON -- Homebuilders are sending a message: They won't be able to contribute much to the economic recovery now that government home-buying incentives have vanished.
Home construction and applications for building permits sank in May, overshadowing favorable reports on manufacturing and wholesale inflation.
Fewer homes means fewer jobs. Construction fuels a broad swath of industries across the economy. Yet double-digit unemployment is among the main reasons people have passed on buying new homes. Even with near-record-low mortgage rates and a glut of foreclosed properties on the market, the industry is struggling.
"The economy is growing and the housing market is still in recession," said Eugenio Aleman, senior economist with Wells Fargo Securities. "It;s not going to contribute to growth, but it is not going to pull the economy back down."
Overall, new home and apartment construction fell 10 percent in May to a seasonally adjusted annual rate of 593,000, the Commerce Department said Wednesday. April's figure was revised downward to 659,000.
Applications for new building permits -- a sign of future activity -- sank 5.9 percent to an annual rate of 574,000. That was the lowest level in a year.
Builders are scaling back now that tax credits of up to $8,000 have expired. The biggest evidence of that trend: the number of new single-family homes tumbled 17 percent, the largest monthly drop since January 1991.
Robert Dye, senior economist with PNC Financial Services Group, said housing is likely to remain a drag on the economy through the fall. Builders aren't likely to ramp up until the end of the year.
"What we're looking for is to see evidence that the economy is gaining momentum as the government disengages," Dye said. "We're not there yet."
The poor report on housing came despite more promising reports on the economy. Inflation at the wholesale level remains tame and industrial production rose for the third straight month. Output at the nation's factories, mines and utilities climbed 1.2 percent in May, the Federal Reserve said Wednesday.
Factory production rose 0.9 percent. Utility production jumped 4.8 percent, thanks to warm weather that prompted people to crank up their air conditioners. Mining was the only component that lagged.
Wholesale prices actually fell for a second straight month in May. But the 0.3 percent dip was pulled down by a 7 percent drop in gasoline prices and a 7.4 percent fall in home heating oil prices. Core inflation, which excludes energy and food, rose 0.2 percent in May and is up just 1.3 percent over the past 12 months.
Falling energy costs are expected to keep inflation low in June. Gasoline costs are down significantly from a month ago. The nationwide average for regular gasoline is $2.70 currently, down from $2.87 a month ago, according to AAA's Daily Fuel Gauge Report.
Food costs dropped 0.6 percent, the biggest decline since July. The decreases were led by an 18 percent drop in the cost of fresh vegetables. But vegetable prices had been driven higher because of freezes earlier in the year in Florida.
The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to provide support for the economic recovery.
Wall Street appeared to show little concern with the housing figures. The Dow Jones industrial average fell six points in midday trading.
The rate of home building is still up about 41 percent from the bottom in April 2009. But it's down 70 percent from the decade's peak in January 2006.
In a typical economic recovery, the construction sector provides much of the fuel. But that hasn't happened this time. Developers are trying to sell a glut of homes built during the boom years. And they must compete against foreclosed homes selling at deep discounts. As a result, new home sales made up about 7 percent of the housing market last year, down from about 15 percent before the bust.
Each new home built creates the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders. The impact is felt across multiple industries, from makers of faucets and dishwashers to lumber yards, but it has weakened in recent years.
Spending on residential construction and remodeling made up only about 2.4 percent of the nation's economic activity in the first quarter of the year. That's down from a peak of more than 6 percent during the housing market's boom years.
Homebuilders are feeling less confident in the recovery now that government incentives for buyers have expired. The National Association of Home Builders said Tuesday its housing market index fell in June after two straight months of increases.
Builders had been more optimistic earlier in the year when buyers could take advantage of tax credits of up to $8,000. Those incentives expired on April 30, although buyers with signed contracts have until June 30 to complete their purchases.
Thanks to the tax credits, sales of new homes rose nearly 15 percent in April. That followed a nearly 30 percent surge in March, the biggest monthly increase in 47 years. But experts anticipate home sales will slow in the second half of this year. In addition, high unemployment and tight mortgage lending standards have kept buyers away.