Housing Starts May Drop to 12-Year Low: U.S. Economy Preview

By Shobhana Chandra

Oct. 14 (Bloomberg) -- Builders in the U.S. broke ground in September on the fewest houses in 12 years, giving the Federal Reserve reason to be more concerned about economic growth than inflation, government reports this week may show.

Housing starts fell 3.6 percent to an annual rate of 1.285 million, according to the median forecast of economists surveyed by Bloomberg News ahead of the Commerce Department's Oct. 17 report. Consumer prices rose 0.2 percent after dropping in August, Labor Department figures the same day may show.

Higher mortgage costs and stricter lending rules will further depress home sales, worsening the slump in residential construction that threatens to end the expansion. The Fed will lower interest rates again this year as the pall cast by housing outweighs the risk that inflation will accelerate, economists said.

``The next batch of housing data is likely to be extremely soft,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. ``The Fed's forward-looking approach makes it more inclined to cut rates.''

The construction report may show permits, an indicator of future building, dropped to a 1.29 million annual pace, also a 12-year low.

An Oct. 16 report will reinforce the view that the outlook for housing has dimmed. The National Association of Home Builders/Wells Fargo index of homebuilder sentiment probably dropped to a record low of 19 in September from 20 the prior month, according to the survey median. Figures lower than 50 mean most respondents view conditions as poor.

Builder Woes

Centex Corp., the fourth-largest U.S. homebuilder, said Oct. 12 it will take a $1 billion charge on property and will generate less cash from sales than forecast.

``These adjustments reflect the market's further deterioration over the quarter and the significant effects of the mortgage-market disruptions,'' Chief Executive Officer Timothy Eller said in a statement.

The Labor Department's inflation report may show consumer prices rose 2.8 percent in the year ended in September, the biggest 12-month increase since March, according to the survey median.

Core prices, which exclude food and energy, probably also increased 0.2 percent and were up 2.1 percent from a year earlier, matching the August gain as the smallest this year.

Investors and economists have reduced bets the Fed will trim rates at its next meeting later this month, while the majority still projects a cut in December.

Fed Took Action

Policy makers lowered the benchmark rate by a half point to 4.75 percent on Sept. 18. The decision followed the August turmoil in financial markets, triggered by concern over rising defaults by subprime mortgage borrowers, or those with poor or limited credit history.

The central bank's compendium of regional economic anecdotes, called the Beige Book for the color of its cover, will be issued Oct. 17. Central bankers will use the assessments to frame their policy discussion at their next meeting Oct. 31.

The deepening housing slump and two-day strike against General Motors Corp. last month probably restrained industrial production, the Fed may report Oct. 16. Output at factories, mines and utilities rose 0.1 percent, the smallest gain in four months, the survey median showed.

Regional factory reports are forecast to show the cooling in manufacturing continued this month. Indexes from the Fed Banks of New York, due tomorrow, and Philadelphia, due Oct. 18, probably fell, economists said.

Growth Forecasts

The economy will grow at a 1.8 percent annual pace this quarter after expanding at a 2.7 percent rate from July through September, according to the median estimate of economists surveyed earlier this month.

Since then, some economists have boosted forecasts for third-quarter growth to over 3 percent after reports showed the trade deficit shrank more than forecast in August and retail sales strengthened last month.

Finally, a closely watched gauge of the future course of the economy probably rebounded in September as stock prices climbed to a record. The Conference Board's index of leading economic Indicators, due Oct. 18, rose 0.3 percent last month after dropping 0.6 percent in August, the New York-based research group is forecast to report.

The index suggests the economy will be able to weather the biggest housing slump in 16 years even as growth slows.

Bloomberg Survey

Date Time Period Indicator BN Survey Prior
10/16 9:15 Sept. Capacity Utilization 82.1% 82.2%
10/16 9:15 Sept. Industrial Production 0.1% 0.2%
10/17 8:30 Sept. Consumer Price Index 0.2% -0.1%
10/17 8:30 Sept. CPI Ex-food & energy 0.2% 0.2%
10/17 8:30 Sept. Housing Starts 1.2825M 1.331M
10/18 8:30 10/6 Continuing Claims 2530K 2521K
10/18 8:30 10/13 Initial Jobless Claims 313K 305K
10/18 10:00 Sept. Leading Indicators 0.3% -0.6%
10/18 12:00 Oct. Philadelphia Fed 7.0 10.9

Last Updated: October 14, 2007 09:45 EDT