Economists taken by surprise

Economists had expected housing starts to slip, but the sharpness of the downturn took them by surprise.

"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."

The dour report pushed up prices for bonds and weighed on the dollar as traders saw greater likelihood the Federal Reserve would follow up a rate cut it made last month with another at its next meeting on October 31.