MercoPress. South Atlantic News Agency

Housing slump expected to leave Fed rate unchanged

House construction in United States dropped 6% in August while producer prices rose by just 0.1% following on moderate energy costs.

The information together with a small drop in consumer inflation is considered crucial for Wednesday's meeting of the Federal Reserve when interest rates are expected to be left unchanged.

The 0.1% rise in producer prices was lower than analysts' expectations of a 0.2% increase, and once energy and food costs are stripped out, core prices actually fell 0.4%. Following July's 0.3% fall in core producer prices, this marked the first back-to-back monthly decline since 2003.

Sensitive wholesale energy prices rose 0.3% in August after July's 1.3% jump with gasoline prices at the pump dropping 2.2%.

But the fall in new home starts was larger than expected and follows recent monthly drops in sales of both new and previously owned homes. Analysts said the three year decline may signal that the previously buoyant housing market has come back down to earth as two years of successive rate rises, which only came to an end last month, have stretched individual and family budgets.

Housing starts actually dropped to an annual rate of 1.665 million in August, according to the US Commerce Department.

The slump in housing, which fueled growth for half a decade, is now seen so deep that it raises concerns the rest of the economy could be dragged down with it.

Federal Reserve policy makers meet tomorrow Wednesday and is expected to leave the basic lending rate at 5,25% for a second month, following 17 successive hikes.

Building permits dropped to an annual rate of 1.722 million from 1.763 million the prior month. Not since May to November 1986 have permits declined seven straight months.

However US Treasury Secretary Henry Paulson told his counterparts at a Group of Seven meeting in Singapore this week that they needn't worry about a housing-led collapse of the world's largest economy. The real-estate market is cooling from an ''unsustainable'' expansion, he said.

The US National Association of Realtors forecast house sales will probably drop 8% this year. Median existing home prices will rise 2.8% in 2006 to 225,900 US dollars after having soared 10.5% in 2005.

The slowdown in the real estate market is producing smaller gains in home prices that may remove a source of strength for consumer spending.