US housing sector "exceptionally weak": SF Fed

By Ros Krasny

CHICAGO (Reuters) - Weakness in the housing sector is likely to keep U.S. economic growth subpar through the end of 2008, according to an economist at the Federal Reserve Bank of San Francisco.

"Conditions in the housing sector remain exceptionally weak," said Economist Simon Kwan in the bank's latest "FedViews" newsletter, published on Wednesday.

Forward-looking indicators suggest that housing construction activity will fall further, he said in the report, which was published on Wednesday.

On Wednesday the U.S. Commerce Department reported a 10.2 percent decline in housing starts for September, to a 1.19 million unit annualized pace.

The year-over-year decline was a remarkable 30.8 percent while housing permits fell by 25.9 percent on the year.

The weakest quarterly growth is likely to be in the fourth quarter, according to the FedViews forecasts.

Real gross domestic product, the broadest measure of economic output, should come in at or just above 2 percent, annualized, in each quarter of 2008.

However, "there is a considerable amount of risk to this forecast related to the duration and degree of resolution of credit conditions," Kwan noted.

The economist said the combination of rising unit labor costs, high crude oil prices and the falling dollar pose an ongoing risk of higher inflation.

Inflation expectations, which are watched closely by Fed policy-makers, have been giving out some mixed signals recently, with forward inflation prospects for the next 6 to 10 years drifting up, Kwan said.

Actual inflation was termed "well-behaved" given the drop to 1.8 percent in the year-on-year core personal consumption expenditures (PCE) price index for August.

"Core PCE inflation is expected to stay below 2 percent for the remainder of this year and in the first half of 2008," Kwan said.