August producer prices dip, home builders gloomy

By Alister Bull

WASHINGTON (Reuters) - August producer prices fell sharply and home builders became more worried about their sales outlook, data on Tuesday showed, in a gloomy picture for U.S. growth that the Federal Reserve underlined by slashing interest rates.

The NAHB/Wells Fargo Housing Market index dipped two points to 20 in September, the National Association of Home Builders said in a statement, matching a record low of January 1991 when the economy was mired in recession.

"Builders are expressing concern that home buyers are getting spooked by the many headlines they are seeing on mortgage market issues," said NAHB President Brian Catalde.

A reading of the index below 50 means more builders view market conditions as poor than favorable.

The U.S. central bank cut its target overnight fed funds rate by half a percentage point to 4.75 percent in a move it said was designed to help forestall adverse effects from financial market turbulence churned by the housing slump.

U.S. Treasury prices and the dollar fell on the news while stocks soared, extending gains on results from U.S. investment bank Lehman Brothers Holdings LEH.N that allayed worries about the depth of credit market turmoil and on expectations of a Fed rate cut.

INFLATION WATCH

Policy-makers said some inflation risks remained and developments would be monitored carefully.

Analysts said the latest inflation readings will comfort the central bank. Prices facing producers fell a much larger-than-forecast 1.4 percent in August as energy costs slumped.

It was the largest drop in producer prices since a 1.5 percent dip in October 2006, while the 6.6 percent decline in finished energy goods prices last month was the sharpest since an 8.0 fall in April 2003, the Labor Department said.

Oil prices have since rebounded and U.S. crude oil notched a fresh record on Tuesday of $82.16 a barrel, sending a warning that inflation is still at risk from energy prices. But analysts focused on the headline producer price decline.

"The better news inside the data is that pricing in the pipeline eases noticeably," Joseph Brusuelas, chief economist at IDEAglobal, said in a note to customers.

Economists polled by Reuters had expected producer prices -- a gauge of the prices paid at the farm and factory gate -- to fall 0.2 percent last month after an unrevised 0.6 percent gain in July.

The data was released a day ahead of the closely watched consumer inflation report, which analysts polled by Reuters forecast to be unchanged in August after rising 0.1 percent the previous month.

Stripping out volatile food and energy costs, producer prices rose 0.2 percent in August following an unrevised 0.1 percent increase in July. Economists had expected a rise of 0.1 percent last month.