July home building up

WASHINGTON (Reuters) - New home building rose at a much weaker pace than expected in July and permits hit a 14-month low, though sturdy growth in industrial output implied the economy has enough strength to keep growing.

Tuesday's mixed batch of data also showed a tick up in producer inflation last month, calming fears of deflation -- an economically disabling, broad-based drop in consumer prices.

Worries of deflation and a double-dip recession have dominated investor sentiment in recent weeks, but economists believe the fears are overdone.

"This soft patch will be temporary. There are a lot of special factors -- such as expiration of housing tax credits, firing of Census workers and the European financial crisis -- which have caused this summer lull," said Richard DeKaser, President of Woodley Park Research in Washington.

Housing starts rose 1.7 percent to a seasonally adjusted annual rate of 546,000 units, the Commerce Department said, but below market expectations for a 560,000-unit pace.

New building permits, which give a sense of future home construction, dropped 3.1 percent to a 565,000-unit pace last month, the lowest level since May 2009. Financial markets had expected a 580,000-unit rate.

Separately, industrial output jumped 1 percent last month after slipping 0.1 percent in June, the Federal Reserve said. Output gains were seen across the board, with automotive products surging 8.8 percent.

In a third report showed prices paid at the farm and factory gate rose 0.2 percent last month, pulled by higher prices for food and consumer goods, the Labor Department said.

The increase, which was in line with market expectations, was the first advance in producer prices in four months. Core producer prices, which strip out energy and food costs, increased 0.3 percent from June.

DEFLATION FEARS ALLAYED

John Canally, economist at LPL Financial in Boston said the PPI data should ease some market concerns about deflation. But he said the housing figures suggested an economic recovery that was listless, not still did not believe output would contract.

"We still think it's slow growth rather than a double dip, but each week that passes you tend to get a little more concerned if you don't get better activity indicators," said Canally.

U.S. stocks rose after bellwether retailers Wal-Mart Stores Inc and Home Depot Inc recorded better-than-expected profits. But Wal-Mart warned the U.S. consumer remained under pressure.

Prices for U.S. government debt fell on easing fears of deflation and also after Monday's hefty gains. The U.S. dollar was little changed against the yen.

The slowdown in the economic growth pace is largely a reflection of the waning of some government stimulus programs, including a popular homebuyer tax credit, which had helped to power the recovery that started in the second half of 2009.

The end of the tax credit in April has left a void in the housing market, depressing sales and building activity. Sentiment among home builders touched a 17-month low in August, a survey showed on Monday.

On Tuesday Treasury Secretary Timothy Geithner told a housing conference that there was a strong case for a carefully designed government guarantee for mortgages.

"Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale," Geithner said. "House price declines could be more acute, with even greater damage to financial wealth.

The rise in housing start last month reflected a 32.6 percent surge in groundbreaking activity in the volatile multifamily segment to an annual rate of 114,000 units. Single-family homes starts fell 4.2 percent to a 432,000-unit pace, the lowest since May 2009.

Home completions tumbled a record 32.8 percent to an all-time low 587,000-unit pace. The inventory of total houses under construction fell 1.1 percent to a record low 444,000 units last month, while the total number of units authorized but not yet started dropped 1.5 percent 89,000 units.

(Additional reporting by Doug Palmer and Pedro Nicolaci da Costa in Washington, Richard Leong and Leah Schnurr in New York; Editing by Chizu Nomiyama)