By Lucia Mutikani
WASHINGTON (Reuters) - U.S. housing starts recorded their biggest drop in almost three years in January as harsh weather disrupted activity, but the third month of declines in permits hinted at some weakness in the housing market.
Wednesday's data was the latest suggestion that a brutally cold winter was putting a big dent in the economy. But severe weather cannot be blamed for all the slowdown in growth as the economy appears to have ended 2013 with less momentum.
"The housing sector already slowed down in the fourth quarter and it's not picking up," said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York. "There is more than the weather at play and the underlying dynamics are not as favorable as people thought they were."
Groundbreaking tumbled 16.0 percent to a seasonally adjusted annual rate of 880,000 units, the lowest level since September, the Commerce Department said. The percentage drop was the largest since February 2011. Economists had expected starts to fall to only a 950,000-unit rate in January.
Until recently, hopes were high for strong growth this year, but it now appears output in the fourth quarter was not as sturdy as initially thought, with downward revisions to November and December retail sales figures. In addition, export growth was weak in December.
The slowdown in growth partly reflects some unwinding of inventories after a massive increase in the second half of 2013.
Last month, groundbreaking for homes in the Midwest tumbled a record 67.7 percent and was down 12.5 percent in the South, indicating that the weather was the culprit. That gave some economists hope for a rebound, but starts could fall again in February as temperatures remained biting during the month.
"To the extent that this plunge in home construction was due mostly to weather issues, we expect a strong rebound in activity in the coming months," said Millan Mulraine, deputy chief economist at TD Securities in New York.
But there are some holes in the weather theory. The Northeast, which bore the brunt of the frigid temperatures and snow storms, saw groundbreaking hitting its highest level since August 2008. In addition, starts in the West, where temperatures have been a bit warmer, also fell.
Some economists said this suggested some weakening in housing market fundamentals, noting that home sales have been trending lower as higher mortgage rates and rising house prices sideline potential buyers.
Demand for loans to purchase homes plunged last week and a report on Tuesday showed confidence among home builders tumbled in February, with some complaining about a shortage of labor, materials and building lots.
Investment in home building fell in the fourth quarter for the first time since the third quarter of 2010.
FIRST-QUARTER GROWTH ESTIMATES CUT
Some economists lowered their first-quarter growth estimates on the back of the weak starts data. Goldman Sachs trimmed its forecast by a tenth of a percentage point to a 1.8 percent annual rate. Barclays cut its estimate by 0.3 percentage point to a 1.9 percent rate.
Freezing temperatures also chilled manufacturing output last month and were cited for the unexpected drop in retail sales in January. The weather was also largely blamed for the sharp slowdown in hiring in December.
Economists expect officials at the Federal Reserve to look past the weather distortions as the central bank dials back its monetary stimulus, but caution a continued run of weak data could be a challenge.
San Francisco Fed President John Williams told CNBC TV the economy was on a "really solid footing" for this year.
"The economy is growing close to 3 percent, I think we're in a good place to start pulling back on the gas somewhat," said Williams.
Minutes of the Fed's January 28-29 policy meeting, released on Wednesday, showed several officials wanted to make it clear that the central bank's asset-purchase program would be trimmed in predictable, $10-billion steps unless the economy surprised.
A report on Wednesday from the Labor Department showed little sign of inflation at the factory gate in January. The seasonally adjusted producer price index for final demand rose 0.2 percent last month as the cost of goods increased.
Prices received by the nation's farms, factories and refineries had edged up 0.1 percent in December.
The renamed index has been broadened to include services and construction. It was previously known as PPI for finished goods.
The PPI for final demand excluding food and energy costs also rose 0.2 percent after being flat the prior month.
"The Fed is going to be talking about inflation, or lack thereof, a lot more in the months to come, unless we see a major warming in both the weather and the economy this spring," said Diane Swonk, chief economist at Mesirow Financial in Chicago.
Groundbreaking for single-family homes, the largest segment of the market, fell 15.9 percent to a 573,000-unit pace in January. That was the lowest level since August 2012.
Starts for the volatile multi-family homes segment dropped 16.3 percent to a 307,000-unit rate.
Permits to build homes fell 5.4 percent in January, the largest drop since June, to a 937,000-unit pace. Permits for single-family homes slipped 1.3 percent. Multifamily sector permits declined 12.1 percent.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Chris Reese)