By Burton Frierson
NEW YORK (Reuters) - A series of reports on Thursday implied the U.S. economy was regaining its vigor at the beginning of 2007 without generating a spike in inflation.
Not only was there an unexpected pickup in new-home building in December but the pace of January business activity in the Philadelphia area also picked up and new claims for unemployment pay dropped to an 11-month low last week.
Nonetheless, the Labor Department said core consumer prices, which exclude food and energy costs, rose by a relatively tame 0.2 percent in December after being flat in November. The overall Consumer Price Index was up 0.5 percent after also being unchanged in the prior month.
An index prepared by the Philadelphia regional Federal Reserve bank showed business activity at its highest level since August, when concern about a slowdown was growing.
The index, which is taken as an early indicator of the health of U.S. manufacturing -- hit 8.3 in January, compared with a revised -2.3 in December.
Lynn Reaser, chief economist for Banc of America Capital Management in Boston, said the Philadelphia Fed report only confirmed that the economy was on such solid ground that there were unlikely to be any interest-rate cuts soon.
FORGET RATE CUTS
"The bond market will see this as another sign that the economy is growing at a better-than-expected pace and will continue to dim the prospects of an easing by the Fed, at least in the near-term," Reaser said.
Prices for debt securities were up across the board. The benchmark 10-year U.S. Treasury note gained 7/32 of a point to yield 4.76 percent, down from 4.79 percent on Wednesday. Prices for 30-year bonds rose 14/32 and yielded 4.85 percent compared with 4.87 percent on Wednesday.
In other positive news, oil prices briefly dipped below $50 a barrel for the first time since May 2005 as U.S. crude oil stockpiles grew. That potentially means lower production costs for U.S. industry and less pressure on consumer prices.
But stock prices fell, partly because of disappointing earnings outlooks for high-tech companies like Apple Inc. and semiconductor equipment maker Lam Research Corp. . Cheaper oil prices hurt Exxon Mobil and ConocoPhillips .
The Dow Jones industrial average ended down 9.22 points at 12,567.93 while the Nasdaq composite index shed 36.21 points to close at 2,443.21.
ENERGY A KEY FACTOR
Energy was the main reason that consumer prices climbed in December. Energy prices rose 4.6 percent after a 0.2 percent fall in November and bigger drops in September and October but that should abate as world oil prices ease.
"The latest consumer inflation report indicated that core consumer inflation is gradually dissipating following its early-year bulge," said Peter Kretzmer, senior economist for bank of America in New York.
For the full year 2006, consumer prices increased by 2.5 percent, an improvement over 2005 when they rose 3.4 percent.
A Commerce Department report said housing starts unexpectedly climbed 4.5 percent in December to a seasonally adjusted annual rate of 1.642 million units from November's 1.572 million.
"The housing starts is a weather story," said Keith Hembre, chief economist with FAF Advisors in Minneapolis. "I wouldn't take it as conclusive evidence that the housing downturn is over in a sustained manner."
For all of 2006, starts totaled 1.8 million, down 12.9 percent from 2005 for the biggest annual decline in 15 years.
In testimony on Capitol Hill, Fed Chairman Ben Bernanke avoided any reference to the interest-rate outlook. But he said it was important for the government to get a grip on its tax-and-spend policies before a bulge in retiring "baby boomers" pushes up Social Security and Medicare costs.
Otherwise, the country could face a fiscal crisis that would force either big spending cuts or sharp tax rises.
The Fed is universally expected to keep interest rates on hold when its policy-setting Federal Open Market Committee gathers on January 30-31, a view reinforced by the economic data and by recent remarks from policy-makers.
"I think that we are well positioned where we are," St. Louis Fed Bank President William Poole told reporters on Wednesday before addressing an audience of financial analysts.
Jobs seemed relatively plentiful.
The Labor Department said the number of Americans filing new claims for jobless benefits dropped by a surprisingly large 8,000 last week to 290,000, lowest since last January.
(Additional reporting by Glenn Somerville, Patrick Rucker and Mark Felsenthal in Washington)
