Sept. 17 (Bloomberg) -- The housing industry is the leading edge of a U.S. economic slowdown that will prompt Federal Reserve policy makers to keep interest rates steady, reports this week are forecast to show.

Builders started work on homes at an annual rate of 1.75 million last month, the fewest since April 2003, according to the median estimate in a Bloomberg News survey of economists before a Sept. 19 report from the Commerce Department. Construction permits probably dropped to a four-year low.

Fed policy makers will have those statistics in hand when they meet the following day to discuss the course of interest rates. A report last week showed price pressures moderated in August, opening the way for central bankers to hold rates steady for a second month to allow time to assess the extent of housing's affect on the economy.

``Housing will ensure economic growth and employment growth will dip,'' said Zoltan Pozsar, an economist at Moody's Economy.com in West Chester, Pennsylvania. ``The Fed is concerned because they don't want to overdo it.''

The central bank at their meeting last month ended a string of 17 consecutive interest-rate increases that started in June 2004. The increases eventually boosted mortgage rates, which contributed to the slowdown in home sales and construction, economists said.

The average rate on a one-year adjustable mortgage reached 5.83 in the first week of July, up from a low of 3.36 percent in March 2004, according to figures from Freddie Mac, the No. 2 buyer of U.S. mortgages. The rate on 30-year fixed mortgages also rose about 1 percentage point during that time.

Profit Forecasts

Builders have suffered the consequences of higher rates. Lennar Corp., the second-largest U.S. homebuilder by market value, last week said profit fell for the first time in six years during the quarter ended Aug. 31. The slump in demand forced the company to offer incentives to buyers.

The Miami-based builder said net new orders fell about 5 percent, less than competitors KB Home or Beazer Homes Inc., which reported declines of more than 40 percent.

The National Association of Home Builders will report its measure of builder sentiment tomorrow. The index probably fell to 31 this month, the lowest in 15 years, from 32 in August, economists forecast. Readings lower than 50 mean builders view conditions as poor.

Central bankers are keeping a close watch on the slowdown in housing to ensure that it stays orderly, San Francisco Fed Bank President Janet Yellen said last week.

All 105 economists surveyed by Bloomberg forecast the Fed will hold its target for the overnight lending rate between banks at 5.25 percent.

Inflation

The Labor Department's report on consumer prices last week reinforced that forecast by showing inflation decelerated last month. Prices rose in August at half the pace of the previous month.

Labor's report on wholesale prices, due Sept. 19, is expected to support forecasts that inflation may have peaked, the economists surveyed say. Prices probably rose 0.2 percent last month, bringing the increase since August 2005 down to 3.8 percent. The 12-month gain in July was 4.2 percent.

Core producer prices, which exclude food and energy costs, also probably rose 0.2 percent last month after slumping 0.3 percent in July, according to the survey median.

Business executives are confident the Fed will be able to engineer a ``soft landing,'' which slows economic growth enough to tame inflation while still maintaining the expansion.

``I am confident with a slowdown in housing and a couple of these things, we should be able to have a slow landing,'' Jack Welch, former chairman of General Electric Co., said in a Sept. 12 interview. The U.S. has the proper mechanisms is place, including ``a smart Federal Reserve,'' to avoid a recession, he said.

Building Permits

The number of building permits issued last month probably dropped to an annual rate of 1.74 million, the lowest since August 2002, the Commerce Department's construction report also is expected to show.

Permits are one of the 10 components of the Conference Board's index of leading economic indicators. The New York-based research group's measure, due Sept. 21, is projected to drop 0.2 percent for August after a 0.1 percent decline the previous month. The index would be down in five of the last seven months.

Still, economists say the index's drop hasn't been steep enough to signal recession.

Current Account

In other reports this week:

The deficit on the nation's current account, the broadest measure of international transactions because it includes income and transfer payments, probably widened to $214 billion in the second quarter, the second-highest ever, from $208.7 billion in the first three months of the year. The gap reached a record $223.1 billion in the fourth quarter of 2005. The Commerce Department's report is due tomorrow.

First-time claims for unemployment benefits rose to 310,000 in the week ended yesterday from 308,000 the prior week, the Labor Department is expected to report Sept. 21.

Manufacturing in the region covered by the Philadelphia Fed, which includes eastern Pennsylvania, southern New Jersey and Delaware, expanded at a slower pace this month than last. The bank's index for September probably fell to 14.5 from 18.5 in August. Readings greater than zero signal growth.

                         Bloomberg Survey

Date    Time   Period  Indicator               BN Survey   Prior
09/18   10:00    2Q    Current Account          $-214B  $-208.7B
09/19    8:30   Aug.   Housing Starts            1.75M    1.795M
09/19    8:30   Aug.   PPI Ex-food & energy      0.2%      -0.3%
09/19    8:30   Aug.   Producer Price Index      0.2%      0.1%
09/21    8:30    9/9   Continuing Claims         2495K     2499K
09/21    8:30   9/16   Initial Jobless Claims    310K      308K
09/21   10:00   Aug.   Leading Indicators        -0.2%     -0.1%
09/21   12:00   Sept.  Philadelphia Fed          14.5      18.5

To contact the reporter on this story: Carlos Torres in Washington at ctorres2@bloomberg.net

Last Updated: September 17, 2006 09:28 EDT