July 17 (Bloomberg) -- Builders started work in June on the fewest single-family U.S. homes since 1991 and manufacturing in the Philadelphia region contracted for an eighth straight month, signaling the economic slowdown is worsening.

Construction starts fell to an annual pace of 647,000, the Commerce Department said today in Washington. A change in New York City building codes spurred total starts, which include condominiums and apartment buildings, to a four-month high.

The figures underscore the housing recession was already deepening before the financial turmoil this month at Fannie Mae and Freddie Mac threatened to further curb mortgage financing. Today's drop in the Philadelphia Federal Reserve's factory gauge showed manufacturers cut orders and employment in July as confidence in the economic outlook deteriorated.

``Hopes for a bottom'' this year in home construction ``are rapidly fading,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. The housing recession ``has been spilling over to manufacturing for months,'' contributing to ``recessionary conditions,'' he said.

Housing starts in the Northeast, which includes New York, soared 242 percent in June. The city's new construction codes tightened safety and environmental standards. Examples include requiring interconnected smoke alarms and so-called ``white roofs'' to reflect heat. Changes in the tax code covering the building of affordable housing units may have also influenced the reading.

``Anyone planning to build had a strong incentive to get started before the deadline,'' Lindsey Piegza, a market analyst at FTN Financial in New York, wrote in a note to clients.

Stocks, Treasuries

Stocks advanced and Treasuries dropped after JPMorgan Chase & Co. joined Wells Fargo & Co. in reporting higher-than-forecast earnings. The Standard & Poor's 500 Stock Index rose 1.2 percent to close at 1,260.32 at 1:44 p.m. in New York. Ten-year notes yielded 4 percent from 3.94 percent late yesterday.

The Philadelphia Fed's general economic index was minus 16.3 in July, lower than forecast, compared with minus 17.1 in June. Negative readings signal a decline, and the measure averaged 5.1 last year. The index of prices paid climbed to 75.6, the highest level since 1980, from 69.3.

``As manufacturers see the final demand for their products go down and inventories go up, they have to slow production and that means less employment,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York in an interview with Bloomberg Television. ``The pricing numbers are important too because it indicates that we're in a period of stagflation.''

Total Starts

Total housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May. Economists forecast a 960,000 reading in June, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey.

A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.

Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding multifamily applications in the Northeast, permits would have risen 0.7 percent.

Work on single-family homes decreased 5.3 percent, bringing it to the lowest level since January 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, jumped 43 percent to an annual rate of 419,000 in June, led by a 242 percent surge in the Northeast.

Starts fell in two of four regions, led by an 11 percent drop in the Midwest.

Influence on Growth

Declines in construction probably will limit economic growth, even as tax rebates boost consumer spending. Residential building dropped at a 24.6 percent pace in the first quarter and subtracted 1.1 percentage points from growth.

Fed Chairman Ben S. Bernanke this week abandoned his June assessment that the threat of an economic downturn had diminished. During testimony before U.S. lawmakers in Washington, he also said that ``upside risks to the inflation outlook have intensified.''

After stabilizing over the last nine months, builders' confidence slumped again in July. The National Association of Home Builders/Wells Fargo sentiment index dropped to 16, the lowest level since records began in 1985, from 18 in June, the group said yesterday.

As property values have fallen, some homeowners are stuck with mortgages they can't afford, and that is leading to an increase in foreclosures. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said last week in a statement.

One in 500

The Irvine, California-based company began collecting statistics on default notices, warnings of scheduled auction and repossessions in January 2005. One in every 500 U.S. households entered a stage of the foreclosure process, RealtyTrac said.

Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to withstand the subprime lending meltdown has also heightened the credit crisis and may further limit access to loans.

M/I Homes inc., a homebuilder concentrating in the Midwest, Florida and the Mid-Atlantic states, said July 10 it delivered 478 homes in the second quarter, down from 755 in the same period in 2007. The Columbus, Ohio-based company said the number of new contracts fell to 530, from 688.

The slump in housing has caused job losses in construction as well as in manufacturing. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month, the Labor Department said this month. The total loss of construction jobs since September 2006 has swelled to 528,000.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: July 17, 2008 16:27 EDT