U.S. stocks fell in early trading Wednesday despite large gains in Japan's Nikkei stock index overnight. Investors in U.S. equities were reacting to a slew of bad news that came in the hours before the market opened: that rescue crews may have to be evacuated because of increasing radiation in the area around the damaged Japanese nuclear plants; that violence in Bahrain was increasing; and that U.S. housing construction and wholesale costs were worse than expected.
The Dow Jones industrial average was down 0.61 percent, the Standard & Poors 500 was off by 0.47 percent, and Nasdaq dropped 0.26 percent. The Commerce Department reported Wednesday that housing starts had fallen 22.5 percent in February to an annual rate of 479,000 units--the steepest decline in 27 years. Building permits, which indicate future construction demand, were at record lows, signaling what some analysts said was more underlying weakness in the housing sector.
But Ian Shepherdson, chief U.S. economist for High Frequency Economics, said he believes the numbers may be a fluke because other indicators have been positive. "Home builder sentiment has been flat in recent months, but consumer confidence has improved, and payrolls have been picking up," he said. Surging food prices and energy costs drove wholesale costs in the United States more than forecast last month. The Labor Department said the producer-price index was up 1.6 percent from the previous month to the highest since June 2009. John Ryding and Conrad DeQuadros of RDQ Economics said this number suggests "significant acceleration in prices."
"We do not buy the Fed's reassurance that these pressures will be temporary, and we believe the public, seeing these strong increases in food and energy ... will not be marking back down their inflation expectations," Ryding and DeQuadros wrote in a research note. On Tuesday, the Federal Reserve said that it considers the U.S. economic recovery to have achieved a "firmer footing." Fed officials also acknowledged a risk of inflation as prices for oil and other commodities have spiked in recent months, but said they expected the increases caused by the political turmoil in the Middle East to be transitory.
Analysts are generally predicting that the Japanese earthquake and tsunami will have only a modest impact on the economies of the United States and Japan's other major trading partners. But the risk of a significant blow to the world economy has been increasing as Japan struggles to stabilize the now-dangerous reactors. The economic cost to Japan itself is certain to be massive, though it's too early to gauge the exact toll. Estimates of the direct damage - the cost of rebuilding homes and factories - range from $160 billion to $200 billion.
Early forecasts also predict that the disasters could reduce the nation's economic output by half a percentage point this year, an additional $25 billion hit. Analysts say it could be much larger if Japan suffers prolonged power outages or if one or more of the reactors goes into total meltdown.