(Adds manufacturing data, analyst comments, markets)
* Housing starts drop 9.6%; building permits fall 1.3%
* Single-family starts tumble 10.1%; permits drop 4.3%
* Housing construction backlog rises 5.0%
* Manufacturing production rebounds 0.7%
WASHINGTON, Aug 16 (Reuters) - U.S. homebuilding fell to the
lowest level in nearly 1-1/2 years in July, weighed down by
higher mortgage rates and prices for construction materials,
suggesting the housing market could contract further in the
The housing market's declining fortunes brought fears of a
broader economic recession back into focus. But with other data
on Tuesday showing industrial production rising to an all-time
high last month despite the high interest rate environment, the
Federal Reserve is expected to stay on its aggressive monetary
policy tightening path.
"Reading the tea leaves on the economy hasn't been this
difficult in years," said Christopher Rupkey, chief economist at
FWDBONDS in New York. "Industrial production has turned down in
every economic recession in history, so the record high this
month is not consistent with a downturn."
Housing starts plunged 9.6% to a seasonally adjusted annual
rate of 1.446 million units last month, the lowest level since
February 2021. Data for June was revised slightly higher to a
rate of 1.599 million units from the previously reported 1.559
million units. Economists polled by Reuters had forecast starts
would decline to a rate of 1.540 million units.
Single-family housing starts, which account for the biggest
share of homebuilding, dropped 10.1% to a rate of 916,000 units,
the lowest level since June 2020. Single-family homebuilding
decreased in the Midwest and the densely populated South, but
rose in the West and Northeast.
Starts for housing projects with five units or more declined
10.0% to a rate 514,000 units. Multi-family housing construction
remains supported by strong demand for rental apartments, with
rising borrowing costs pushing homeownership out of the reach of
Permits for future homebuilding fell 1.3% to a rate of 1.674
million units. Single-family building permits dropped 4.3% to a
rate of 928,000 units. Permits for multi-family housing projects
increased 2.5% to a rate of 693,000 units.
The Fed, which is struggling to bring inflation back to the
U.S. central bank's 2% target, has hiked its policy rate by 225
basis points since March. Mortgage rates, which move in tandem
with U.S. Treasury yields, have soared even higher.
The 30-year fixed-rate mortgage is hovering around an
average of 5.22%, up from 3.22% at the start of the year,
according to data from mortgage finance agency Freddie Mac.
Residential fixed investment declined at its steepest pace
in two years in the second quarter, contributing to the second
straight quarterly drop in gross domestic product during that
period. More pain is likely yet to come for the housing market.
A survey on Monday showed the National Association of Home
Builders/Wells Fargo Housing Market sentiment index fell for an
eighth straight month in August, dropping below the break-even
level of 50 for the first time since May 2020. Rising
construction costs and mortgage rates were largely blamed for
Stocks on Wall Street were trading mixed. The dollar was
steady against a basket of currencies. U.S. Treasury prices
BROAD MANUFACTURING GAINS
While housing is struggling, another sector that is
sensitive to interest rates is forging ahead for now.
In a separate report on Tuesday, the Fed said manufacturing
output rebounded 0.7% in July after declining 0.4% in June.
Economists had forecast factory production would rise 0.2%.
Output increased 3.2% compared to July 2021. Manufacturing,
which accounts for 11.9% of the U.S. economy, remains supported
by strong demand for goods even as spending is gradually
shifting back to services.
But risks are rising, with retailers sitting on excess
inventory, especially of apparel. A strong dollar as a result of
tighter monetary policy could make U.S. exports more expensive.
Production at auto plants surged 6.6% last month. Excluding
motor vehicles, manufacturing rose 0.3%. Output of long-lasting
manufactured consumer goods increased 3.5%, while that of
nondurable consumer goods fell 0.3%.
Mining production increased 0.7%, continuing to be
underpinned by oil and gas extraction. Output at utilities fell
0.8%. The rise in manufacturing and mining output helped to lift
the overall industrial production index by 0.6% to a record high
of 104.8. Industrial output was unchanged in June.
The strong manufacturing production is in stark contrast
with regional factory surveys that have shown a sharp
deterioration in business sentiment.
"Recessions are normally a loss of faith, and it would
appear that manufacturers' sentiment is frayed," said Ryan
Sweet, a senior economist at Moody's Analytics in West Chester,
Pennsylvania. "However, it's important to watch what
manufacturers do rather than say. For now, manufacturers are not
acting as if the economy is in or headed toward a recession."
Though higher borrowing costs are chilling the housing
market, an outright collapse is unlikely because of a critical
shortage of single-family homes for sale, which is keeping
prices elevated. Fewer homes being built because of financial
constraints could pose a conundrum for the Fed, which is seeking
to bring down house prices by slowing demand for houses.
"Lower construction will limit the supply of housing and
potentially dampen the impact of higher rates on home prices,"
said Isfar Munir, an economist at Citigroup in New York.
The number of houses approved for construction that are yet
to be started surged 5.0% to 296,000 units. The single-family
housing backlog increased 2.1% to 146,000 units, with the
completions rate for this segment falling 0.8%.
The inventory of single-family housing under construction
fell 1.2% to a rate of 816,000 units.
(Reporting by Lucia Mutikani Editing by Mark Porter, Mark
Potter and Paul Simao)