WASHINGTON — Housing construction last month dipped to its lowest level in almost a year, providing fresh evidence that the Federal Reserve's six interest rate increases are beginning to slow the economy.
Builders began work on new homes at a seasonally adjusted annual rate of 1.59 million units in May, a 3.9 percent drop from April's level, the Commerce Department reported Friday.
The bigger-than-expected decline left housing starts at their lowest level since last June, when the Fed's latest cycle of interest-rate increases began.
"Housing is beginning to crack!" exclaimed economist Ken Mayland of ClearView Economics. "It is the first domino to fall. A downturn of housing is a nonnegotiable requirement for . . . the Fed to buy into the view that previous interest rate increases are taking hold and a soft landing is commencing."
The Fed's rate increases are designed to gradually slow the red-hot economy to a pace that it regards as more likely to be sustained without sparking inflation — from a rate between 3.5 percent to 4 percent. In the first quarter of the year, the economy grew at a 5.4 percent rate.
The interest-rate sensitive housing market has been an engine of the vibrant economy, and, even with higher rates, activity has remained healthy.
"The white-hot pace of late 1999 and early 2000 has given way to a more realistic pace of activity," said First Union's chief economist, David Orr. "It would be incorrect to characterize the 1.59 million annual rate in May as weak."
On Wall Street, the report had little affect on stocks. Investors focused on other news including profit warnings from Xerox and regional banking company UnionBanCal Corp., which sent the Dow industrials to its biggest selloff in two months. The Dow Jones industrial average lost 265.52 points to close at 10,449.30.
In April, builders began work on 1.66 million housing units, a 1.6 percent increase, considerably weaker than the government estimated.
The average interest rate on 30-year fixed-rate mortgages was 8.5 percent in May.