WASHINGTON (Reuters) - U.S. single-family homebuilding rebounded sharply in February amid a thaw in winter weather while production at factories surged, but rising prices for raw materials because of tariffs threaten the nascent housing market and manufacturing recovery.

The reports on Tuesday did not change the sense that the economy has slowed in the first quarter as President Donald Trump's on-again, off-again duties against the nation's main trade partners and an unprecedented campaign to shrink the federal government through deep spending cuts and mass firings of public workers sour business and consumer sentiment.

"None of the economic reports today are tariff-free," said Christopher Rupkey, chief economist at FWDBONDS. "The economy is swiftly losing momentum here and if Washington does not change course on many of its business-unfriendly proposals and initiatives, the odds of an economic recession could shift from a risk to a reality in a hurry."

Single-family housing starts, which account for the bulk of homebuilding, surged 11.4% to a seasonally adjusted annual rate of 1.108 million units last month, the Commerce Department's Census Bureau said. Homebuilding soared in the Northeast and densely populated South as disruptions caused by frigid temperatures eased. Housing starts also rose in the West, but plunged in the Midwest, likely dragged down by winter storms.

Starts fell 2.3% on a year-over-year basis in February. Trump this month imposed and later suspended a 25% tariff on most goods from Canada and Mexico, which would have pushed U.S. duties on Canadian lumber to nearly 40%. But tariffs on Chinese goods were raised to 20% and levies on steel and aluminum went into effect this month.

The National Association of Home Builders estimated on Monday "a typical cost effect from recent tariff actions at $9,200 per home." Sentiment among homebuilders plunged to a seven-month low in March. 

There have been anecdotes of workers not reporting for duty at construction sites for fear of deportation as the Trump administration cracks down on illegal immigration. 

Undocumented immigrants account for 23% of construction labor, the Center for American Progress estimated in 2021.

Though the average rate on the popular 30-year fixed-rate mortgage has declined from 7% at the start of the year, the economic uncertainty is likely to keep prospective buyers on the sidelines. With new housing inventory at levels last seen in December 2007, builders might have no incentive to break new ground on single-family housing projects. 

Permits for future construction of single-family housing fell 0.2% to a rate of 992,000 units in February.

Stocks on Wall Street traded lower. The dollar advanced against a basket of currencies. Yields on longer-dated U.S. Treasuries rose.

EYES ON FED

Federal Reserve officials meeting on Tuesday and Wednesday are expected to leave the U.S. central bank's benchmark overnight interest rate in the 4.25%-4.50% range, having reduced it by 100 basis points since September, and continue to assess the economic impact of the Trump administration's policies, which are widely deemed as inflationary.

Those inflation concerns were reinforced by a separate report from the Labor Department's Bureau of Labor Statistics showing import prices increased 0.4% in February, matching January's gain and confounding economists' expectations for a 0.1% decline. Import prices, which exclude tariffs, were boosted by higher costs for consumer goods. 

Prices of Chinese imports in the U.S. jumped 0.5%, the largest increase since March 2022, after climbing 0.2% in January. They rose 0.5% on a year-over-year basis, the biggest advance since December 2022.

Though consumer and producer price readings were better than expected in February, the details that go into the calculation of the Personal Consumption Expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2% target were firmer.

Goldman Sachs now estimates the PCE Price Index excluding food and energy increased 0.34% in February, upgraded from 0.29% before the release of the import prices data. Core PCE inflation rose 0.3% in January. It was forecast to increase 2.75% on a year-over-year basis after advancing 2.6% in January.

"Import prices are measured before the imposition of any tariffs and if import prices do not fall sharply in the coming months, it will be clear evidence that the tariffs are being paid by U.S. households and companies," said Conrad DeQuadros, senior economic advisor at Brean Capital.

"Import prices from China are picking up even though the series in this report excludes tariffs. Chinese firms do not appear to be lowering their prices to absorb the 10% tariff," he said.

Financial markets expect the Fed to resume lowering rates in June, after it paused its easing cycle in January. The policy rate was hiked by 5.25 percentage points in 2022 and 2023.

Growth estimates for the first quarter are currently below a 1.5% annualized rate. The economy grew at a 2.3% pace in the October-December quarter. 

Starts for housing projects with five units or more increased 12.1% to a rate of 370,000 units. 

Overall housing starts jumped 11.2% to a rate of 1.501 million units, more than reversing January's decline. Economists polled by Reuters had forecast housing starts would rise to a rate of 1.380 million units.  

Multi-family building permits fell 4.3% to a rate of 404,000 units. That contributed to lowering overall building permits by 1.2% to a pace of 1.456 million units last month.

A separate report from the Fed showed factory output jumped 0.9% in February amid an acceleration in motor vehicle production. That followed a 0.1% rise in January and beat economists' expectations for a 0.3% advance. Economists said factory output was likely boosted by businesses rushing through orders ahead of the duties on imports.

"The threat of tariffs and the on-again, off-again implementation style is likely more damaging for manufacturers who are trying to operate in this environment," said Shannon Grein, an economist at Wells Fargo. "Trying to navigate supply snarls and cost pressures is hard in normal times, adding the uncertainty of tariffs only exacerbates that challenge."