Housing Rocks, Consumer Balks in Latest Data

The Commerce Department noted that building permits, which signal future production, fell to 1.780 million, below expectations of a decline to 1.803 million, from June's revised 1.823 million.

"We're pretty much maxed out as far as housing goes," Naroff said. "I don't expect housing to soften a whole lot in September, but in October and November we will start seeing some consolidation."

To that, Natcher responded: "No doubt demand for housing is sensitive to rates, but at these rates, it's not an issue. We're at the initial stages of a nice economic recovery, and improvement in incomes will compensate higher interest rates on mortgages. So I don't expect any type of dramatic pullback in housing."

The recent rise in mortgage rates was also one of the reasons behind the drop in consumer sentiment in August. Along with continued layoffs, the surge of more than a full percentage point in interest rates led consumers to curb economic expectations.

The Michigan index corroborated the decline in the Conference Board's consumer confidence index, which plunged to 76.6 in July from 83.5 the previous month.

But economists seemed unconcerned about the future implications of the fall.

"The decline was marginal, and the numbers held on to most of the increase since March," said Jim O'Sullivan, U.S. economist at UBS Warburg. "The consumer is still strong, and spending figures are looking better."

Both the Michigan index and the Conference Board figures rose sharply after the end of the Iraq war. They have curbed gains since then, amid job concerns. U.S. companies cut 44,000 workers in July, the sixth decline in payrolls in a row, even though the U.S. jobless rate fell to 6.2% in the month, from a high of 6.4% in June.

However, spending has remained resilient: personal consumption has risen every month since March and is projected to have grown 0.6% in July.

O'Sullivan noted: "June and July retail sales are in boom territory, so there's no reason why spending can't hold on to the current trend." Retail sales rose 0.9% in June and 1.4% in July.

"The key here is that there have been some signs the job market is improving, and the economic recovery will hopefully translate into a pick up in hiring," said O'Sullivan, who predicts the U.S. economy will grow at a 4.5% annual rate in the third quarter and 3.5% in the fourth quarter.

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