* Housing starts drop 16 percent, biggest fall since 2011
* Permits fall 5.4 percent, largest drop in seven months
* PPI final demand up 0.2 percent, core PPI up 0.2 percent
U.S. housing starts recorded their biggest drop in almost three years in January as harsh weather disrupted activity, but the third month of declines in permits hinted at some weakness in the housing market.
Wednesday's data was the latest suggestion that a brutally cold winter was putting a big dent in the economy. But severe weather cannot be blamed for all the slowdown in growth as the economy exited the fourth quarter with less momentum.
"The housing sector already slowed down in the fourth quarter and it's not picking up," said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York. "There is more than the weather at play and the underlying dynamics are not as favorable as people thought they were."
Groundbreaking tumbled 16.0 percent to a seasonally adjusted annual rate of 880,000 units, the lowest level since September, the Commerce Department said. The percentage drop was the largest since February 2011.
Starts for December were revised up to a 1.05 million-unit pace from the previously reported 999,000-unit rate. Economists had expected starts to fall to a 950,000-unit rate in January.
Groundbreaking in the Midwest tumbled a record 67.7 percent and was down 12.5 percent in the South, indicating that the weather was the culprit and giving some economists hope for a rebound. Starts could fall again in February as temperatures remained biting during the month.
An index measuring applications for mortgages to purchase homes was down 6.3 percent last week.
"To the extent that this plunge in home construction was due mostly to weather issues, we expect a strong rebound in activity in the coming months," said Millan Mulraine, deputy chief economist at TD Securities in New York.
But there are some holes in the weather theory. The Northeast, which bore the brunt of the frigid temperatures and snow storms, saw groundbreaking hitting its highest level since August 2008. In addition, starts in the West, where temperatures have been a bit warmer, also fell.
Some economists lowered their first-quarter growth estimates on the back of the weak starts data. Investment in home building fell in the fourth quarter for the first time since the third quarter of 2010.
U.S. Treasury debt prices rose on the data. Stocks on Wall Street were trading mixed, while the dollar was little changed against a basket of currencies.
Freezing temperatures also chilled manufacturing output last month and have been cited for the unexpected drop in retail sales in January. The weather was also largely blamed for the sharp slowdown in hiring in December.
A separate report from the Labor Department showed little sign of inflation at the factory gate in January, another indication of slower economic activity.
The seasonally adjusted producer price index for final demand rose 0.2 percent last month as the cost of goods increased. It was the largest increase since October.
Prices received by the nation's farms, factories and refineries had edged up 0.1 percent in December.
The renamed index has been broadened to include services and construction. It was previously known as PPI for finished goods.
The PPI for final demand excluding volatile food and energy costs also rose 0.2 percent after being flat the prior month.
But another gauge of core producer prices - final demand less foods, energy, and trade services - nudged up 0.1 percent after rising 0.3 percent in December.
Low inflation could see the Federal Reserve keeping its benchmark interest rate near zero for a while even as it dials back its monetary stimulus. Economists expect officials at the U.S. central bank to look past the weather distortions, but caution that a run of weak data could be a challenge.
Economists expect the government to lower its tally of fourth-quarter gross domestic product to an annual pace of about 2.4 percent from 3.2 percent. The trade deficit in December was much larger than the government had assumed in its first GDP estimate.
In addition, revisions to November and December retail sales figures pointed to a much slower pace of consumer spending, while the accumulation of wholesale inventories in December was below the government's forecasts.
Some economists argue that the fact the data was already being revised weaker before the bad weather set in indicated some fundamental loss in momentum in the economy.
Groundbreaking for single-family homes, the largest segment of the market, fell 15.9 percent to a 573,000-unit pace in January. That was the lowest level since August 2012.
Starts for the volatile multi-family homes segment dropped 16.3 percent to a 307,000-unit rate.
Permits to build homes fell 5.4 percent in January, the largest drop in since June, to a 937,000-unit pace. Permits for single-family homes slipped 1.3 percent. Multifamily sector permits declined 12.1 percent.