Home Starts, Factory Production May Fall: U.S. Economy Preview

Home Starts, Factory Production May Fall: U.S. Economy Preview

March 16 (Bloomberg) -- Builders in the U.S. broke ground in February on the fewest houses in 17 years and factory production fell, a sign the deepening real-estate slump is dragging the economy into a recession, government reports this week may show.

Residential home starts fell 1.7 percent to an annual rate of 995,000, according to the median forecast of economists surveyed by Bloomberg News ahead of the Commerce Department's March 18 report. Industrial output likely dropped in February for the first time in four months, Federal Reserve figures may show.

Housing, the source of the economic downturn, may weaken further as property values fall and credit shrinks. Economists predict the Fed will lower the benchmark interest rate again at its March 18 meeting after it broadened plans last week to stabilize financial markets and rescued Bear Stearns Cos. with emergency funding.

``There's certainly feed-through into the economy from the downturn in the housing and credit markets,'' said Adam York, economist at Wachovia Corp. in Charlotte, North Carolina. ``Fed policy makers will cut rates, but they're also looking for new ways to provide liquidity and restore confidence.''

The construction report may show permits, an indicator of future building, dropped to a 1.02 million annual pace, also a 17-year low.

The National Association of Home Builders/Wells Fargo builder sentiment index, due on March 17, may hold at 20 for a second month, according to the Bloomberg survey. Figures less than 50 mean most respondents view conditions as poor.

Factories are also cutting back as the biggest housing slump in a generation prompts Americans to spend less on furniture, appliances and automobiles.

Factory Production

Production at manufacturers, mines and utilities fell 0.1 percent in February after rising the prior month, the survey showed. The March 17 report may also show the amount of capacity in use declined.

Export gains, which have kept manufacturing growing, may no longer be enough to sustain the expansion. Economists forecast regional Fed reports will show factory activity shrank in March in both the New York and Philadelphia areas.

The central bank will lower the benchmark rate by a full percentage point to 2 percent this week, according to futures trading. Mortgage borrowing costs have failed to fall as much as the Fed's rate amid concern about defaults.

The Fed and JPMorgan Chase & Co. two days ago stepped in to rescue Bear Stearns, the fifth-largest U.S. securities firm. Earlier, the Fed said it will lend Treasuries in exchange for debt that includes private securities backed by mortgages.

Not `Prudent'

Too many home loans have been ``neither responsible nor prudent,'' Fed Chairman Ben S. Bernanke said at a conference on March 14. He called for ``strong oversight'' of mortgage lenders, and didn't discuss interest rates or the economic outlook in the text of his speech.

Home foreclosure filings jumped 60 percent and bank seizures more than doubled in February from the same month last year as rates on adjustable mortgages rose and property owners were unable to sell or refinance, according to RealtyTrac Inc., a seller of foreclosure data.

Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, last week reached an agreement with banks on new lending terms after slowing home sales made it harder to generate cash. Hovnanian also reported its sixth straight quarterly loss.

``The market's too challenging to make accurate forecasts for fiscal '08,'' Chief Executive Officer Ara Hovnanian said on a March 11 conference call with analysts.

Finally, on March 20, the New York-based Conference Board's index of leading economic indicators, a gauge of the economy's direction, may post the fifth consecutive monthly decline in February.

BLOOMBERG