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

"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. "The pricing numbers are important too because it indicates that we're in a period of stagflation."

The housing industry, which has been in a slump for more than two years, is struggling to cope with record levels of unsold new and existing homes. That glut is being expanded by swelling levels of foreclosures, which are dumping even more houses on the market.

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

Buyers are reluctant to purchase a home with home prices still falling sharply, and even those buyers who are ready to commit are having trouble qualifying for a loan as lenders tighten standards in response to soaring mortgage delinquencies.

"Job-market losses, deepening problems in the finance area and sinking home values, aggravated by the wave of foreclosures, are all contributing factors that are keeping potential buyers on the sidelines," David Seiders, chief economist for the home builders, said Thursday.

Pat Newport, an economist with Global Insight, predicted that total housing starts will fall to 933,000 this year, down 33 percent from last year. That would be the lowest annual total since World War II.

The report on housing construction showed that applications for building permits, considered a good sign of future activity, rose by 11.6 percent to a seasonally adjusted annual rate of 1.091 million units. This increase was also skewed by a big rise in applications in New York, however.

Housing construction soared by 102.6 percent in the Northeast, but fell by 12.8 percent in the Midwest, 9.4 percent in the West and 1.4 percent in the South.

Separately, the Labor Department reported that the number of newly laid-off people signing up for jobless benefits rose by 18,000 last week to 366,000, the highest level since late June. The increase was below the number that economists had been expecting.