Fed set to hold US rates after housing slowdown

The housing industry in the US took a nosedive last month, according to official figures that will fuel fears of a sharper slowdown but prevent the Federal Reserve from raising interest rates tonight.

The number of housing starts dropped 6 per cent in August, to take the annual decline to a four-year low of almost 20 per cent, the Commerce Department sent.

Permits for future groundbreaking, an indicator of builders' confidence in the market, fell 2.3 per cent to its lowest level in four years.

All the figures were worse than expected and came just days after the International Monetary Fund identified a slump in the US housing market as one of the key threats to the global economy.

"Housing is clearly in the midst of a hard landing and the trough seems to be some way off," said Patrick Franke, a US economist at Commerzbank. "However, in the absence of a recession, a national housing price crash still remains unlikely."

It comes a day after the National Association of Home Builders said that builders' confidence had slumped to its weakest level since 1991.

"This implies an increasingly negative outlook for the consumer sector given the importance of mortgage equity withdrawal and the positive wealth effects housing has provided for the consumer in recent years," said James Knightley at ING Financial Markets.

Economists said the construction figures, combined with weak data on factory inflation, ruled out any lingering chance of a rate rise tonight.

Producer prices edged up a smaller-than-expected 0.1 per cent in August while core inflation posted a surprise drop of 0.4 per cent, the biggest since April 2003.

The decline in the core producer price index, which strips out volatile food and energy costs, reflected a 2.6 per cent drop in auto prices and a 3.4 per cent decline in the price of light trucks and SUVs.

The index had fallen by 0.3 per cent in July, marking the first time since the end of 2002 that it had fallen for two months in a row.

Roger Kubarych at HypoVereinsbank said: "Inflation hawks may not be silenced by the fall in the producer price index or by the continuing drop in home building."

Greg Anderson, a senior currency strategist at ABN Amro in Chicago, said: "We knew the Fed was going to pause on Wednesday. It does make it much more likely that they'll stay paused thereafter if the housing sector is this weak."