Housing data add to slump worries

Groundbreaking for new U.S. homes and permits for future building both hit a 14-year low last month, increasing worry about a deepening housing slump and prompting investors to boost bets on interest rate cuts.

Housing starts tumbled 10.2% to an annual rate of 1.19 million units, the slowest since March 1993, the Commerce Department said Wednesday. Economists had expected starts to slip, but the sharpness of the downturn took them by surprise.

“There is no end in sight,” said Kurt Karl, chief U.S. economist at Swiss Re in New York. “The builders didn’t realize how many cancellations they are going to face. If we hit [the] 1.0-million start range, it’s consistent with recessions in the past. And we are heading in that direction.”

A separate report showed the economy facing inflation pressure from food and energy, which could complicate the Fed’s thinking on borrowing costs.

The Labor Department said the consumer price index, the most broadly used gauge of inflation, rose 0.3% last month, the biggest gain in four months. However, the core rate, which excludes energy and food, moved up a modest 0.2%.

“The housing starts and consumer price inflation numbers highlight the tough dilemma the Federal Reserve faces,” said Bernard Bauhmohl, managing director of Economic Outlook Group in Princeton Junction, N.J.

“Both of its mandates -- averting recession and controlling inflation -- are now being challenged,” he said.

The “beige book” report, a survey conducted by regional Federal Reserve banks to help policymakers prepare for their Oct. 31 interest rate meeting, found that U.S. economic growth has slowed since August, with consumers pulling back a bit and housing falling further.

The Fed bank in San Francisco noted that the regional economy “showed signs of further deceleration” and that “tighter lending standards took a toll in housing markets.” Food prices increased.

The Commerce Department said permits for future building fell 7.3% last month, the sharpest drop since January 1995, to an annual rate of 1.226 million, the lowest level since July 1993.

A separate report Wednesday showed that mortgage applications rose for a second straight week, but some analysts said that was a sign that potential borrowers were being turned down for loans and were applying more frequently.