Ironically, manufacturing has borne the brunt of the trade tariffs, which the White House argues are necessary to protect industries from what it says is unfair foreign competition. Other parts of the economy are also starting to show cracks from the trade war, with retail sales dropping in September for the first time in seven months and services sector growth slowing.
Many economists expect the Federal Reserve to cut interest rates for the third time later this month to limit the drag on the economy from the trade war and keep the longest expansion on record, now in its 11th year, on track.
"It inches them forward to taking out a little more insurance to help support the economy that continues to face the headwinds of reduced world trade from tariffs," said Chris Rupkey, chief economist at MUFG in New York.
Housing starts declined 9.4% to a seasonally adjusted annual rate of 1.256 million units last month as construction in the volatile multi-family housing segment dropped, the Commerce Department said. Data for August was revised higher to show homebuilding accelerating to a pace of 1.386 million units, which was the highest level since June 2007, instead of marching to a rate of 1.364 million units as previously reported.
Economists polled by Reuters had forecast housing starts decreasing to a pace of 1.320 million units in September. Housing starts rose 1.6% on a year-on-year basis in September.
The housing market, the most sensitive sector to interest rates, has perked up in recent months as mortgage rates have plunged from last year's multi-year highs.
But the sector, which accounts for about 3.1% of the economy, continues to be hampered by land and labor shortages. A survey on Wednesday showed confidence among homebuilders jumped to a more than 1-1/2-year high in October.
The 30-year fixed mortgage rate has dropped more than 135 basis points to an average of 3.57%, according to data from mortgage finance agency Freddie Mac.
Economists expect a mild rebound in residential investment in the third quarter after it contracted for six straight quarters, the longest such stretch since the 2007-2009 recession.
Single-family homebuilding, which accounts for the largest share of the housing market, rose 0.3% to a rate of 918,000 units in September, the highest level since January. Starts for the volatile multi-family housing segment plunged 28.2% to a rate of 338,000 units in September.
In a separate report on Thursday, the Fed said manufacturing production fell 0.5% last month as a strike by about 48,000 workers at General Motors hammered motor vehicle output. Production at factories increased 0.6% in August.
Excluding motor vehicles, manufacturing output dropped 0.2% after surging 0.7% in August.
Manufacturing has also been hurt by an inventory glut, especially in the automobile sector, and design troubles at Boeing. The fading boost from last year's $1.5 trillion tax cut package is also compounding manufacturing's woes.
In a third report, the Philadelphia Fed said its business conditions index for the region that covers eastern Pennsylvania, southern New Jersey and Delaware fell to a reading of 5.6 in October from 12.0 in September.