By Lucia Mutikani
WASHINGTON (Reuters) - U.S. housing starts rose far less than expected in March and permits recorded their biggest drop since last May, which could raise concerns about the economy's ability to bounce back from a soft patch hit in the first quarter.
The economy stumbled at the start of the year under the weight of a harsh winter, a resurgent dollar, weaker global growth and a now-resolved labour dispute at the West Coast ports.
There are expectations that growth will rebound in the second quarter, but the tepid housing starts report and a struggling manufacturing sector suggest the momentum will probably not be strong enough for the Federal Reserve to start raising interest rates before September.
Groundbreaking increased 2.0 percent to a seasonally adjusted annual pace of 926,000 units, the Commerce Department said on Thursday. That left the bulk of February's decline, which had been blamed on bad weather, intact.
Starts for single-family homes rose, while groundbreaking for the multifamily segment fell last month.
Economists polled by Reuters had forecast groundbreaking rising to a 1.04 million-unit pace in March.
Permits for future home construction declined 5.7 percent to a 1.04 million-unit pace. Permits have been above a 1 million-unit pace since July.
U.S. stock index futures extended losses on the data, while prices for U.S. government debt rose. The dollar fell against a basket of currencies.
Despite the recent weakness, the outlook for housing remains favourable against the backdrop of a strengthening labour market.
While a separate report from the Labor Department showed a surprise rise in the number of people seeking unemployment aid last week, the underlying trend continued to suggest the jobs market was tightening.
More long-term unemployed are finding work. Initial claims for state unemployment benefits rose 12,000 to a seasonally adjusted 294,000 for the week ended April 11.
But claims tend to be volatile around this time of the year because moving holidays like Easter and the school spring break can throw off the model that the government uses to smooth the data for seasonal fluctuations.
The four-week moving average of claims, considered a better measure of labour market trends as it irons out week-to-week volatility, ticked up 250 to 282,750 last week. Claims below 300,000 are associated with a strengthening labour market.
The number of people still receiving unemployment benefits after an initial week was the lowest since December 2000.
With more people receiving a pay check and lending standards eased a bit to attract first-time home buyers, gains in housing are expected this year.
Banking giants Bank of America (N:BAC) and JPMorgan (N:JPM) this week reported a surge in mortgage lending in the first quarter.
Last month, groundbreaking rebounded sharply in the Northeast and Midwest, which had been affected by snowy and cold weather in February. Starts, however, tumbled 19.3 percent in the West and fell 3.5 percent in the South, where most of the home building takes place.
Last month, single-family homes groundbreaking, the largest part of the market, rose 4.4 percent. Groundbreaking for the multi-family homes segment fell 2.5 percent.
Single-family permits rose 2.1 percent last month. Multi-family permits plunged 15.9 percent.