U.S. home builders' optimism hit a near 1-1/2 year low in August and a regional manufacturing gauge grew more slowly than expected, implying the economic slowdown continued into the third quarter.

The reports on Monday came on the heels of data last week showing tepid retail sales growth and benign inflation pressures in July. Still, most economists do not believe the U.S. economy is slipping back into recession.

The manufacturing and housing data confirm that the slowdown in economic activity continued in the second half of this year, said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. I still don't think we will see a double-dip, but the risks have increased, he added.

The National Association of Home Builders/Wells Fargo Housing Market Index slipped one point to 13, defying market expectations for a rise to 15. It was the third consecutive month of decline in the index.

A reading above 50 indicates that more builders view sales conditions as good than poor, but the index has not been above that level since April 2006.

Separately, the New York Federal Reserve said its Empire State general business conditions index rose to 7.10 in August from 5.08 in July. However, the reading was below the 8.00 expected by economists polled by Reuters.

Further signs of a weak recovery from the longest and deepest recession since the 1930s ignited a rally in the U.S. government debt market, with the 30-year bond yield nearing a 16-month low. The benchmark 10-year Treasury yield touched its lowest level since March 20, 2009.

Investors, piling into safe-haven U.S. Treasury debt, were also rattled by news that Japan's economic growth slowed to a crawl in the second quarter, with gross domestic product growth of 0.1 percent, which translates to annualized expansion of 0.4 percent.

Stocks on Wall Street ended flat and the volume of shares changing hands was the smallest so far this year. The U.S. dollar fell against the yen despite the weak Japanese growth numbers.

The U.S. economy grew at a 2.4 percent annualized pace in the second quarter, slowing from a 3.7 percent rate in the first three months of this year.

But trade and business inventory data for June suggested the government will significantly cut second-quarter gross domestic product figures when it publishes its second estimates next week.

WANING GOVERNMENT STIMULUS

The slowdown in the growth pace is largely a reflection of the winding down of some government stimulus programs, including a popular homebuyer tax credit, which had helped to power the recovery that started in the second half of 2009.

The housing sector, which helped trigger the 2007-2009 financial crisis when the subprime mortgage market got out of control, is struggling to regain its footing following the end of the tax credit in April.

The NAHB survey showed the current sales conditions gauge for single-family home sales slipped this month to its lowest level since June 2009. The sales expectations measure for the next six months touched its lowest level since March 2009.

Builders are expressing the same concerns that they are hearing from consumers right now, particularly the sense that the overall economy and job market aren't gaining any traction, said NAHB Chairman Bob Jones.

While manufacturing in New York state rose this month, the Empire State index remained well below its recent high near 32, reached in April. The survey showed the new orders index fell below zero for the first time since June 2009.

The reading on business conditions six months ahead fell to 35.71, the lowest since July 2009, from 41.27 in July.

However, the survey contained some encouraging news on employment, which has been the Achilles heel of the recovery. The employment index rose to 14.29 in August from 7.94 in July and the average workweek index jumped to 7.14 from -9.52.

This report suggests that the manufacturing slowdown of the past few months has continued into August, said Nicholas Tenev, an economist at Barclays Capital in New York.

However, labor market improvement is apparently continuing nonetheless, an encouraging sign that recent weakness may prove temporary as labor income growth fuels the recovery.

Also on Monday, a survey from the Federal Reserve showed lending standards eased somewhat over the last three months but demand for business and consumer loans was largely unchanged. Some economists have blamed the weak economic recovery on tight lending standards.

Adding to uncertainty about the economic outlook, home improvement chain Lowe's Cos said on Monday it missed quarterly profit and sales estimates as benefits from the homebuyer tax credit and cash for appliances programs waned. The retailer warned of uncertain demand.

We don't expect strong industry growth until we experience consistent improvements in the labor and housing markets, which likely will not occur until 2011, Chief Executive Robert Niblock said on a conference call with analysts.

(Writing by Lucia Mutikani; additional reporting by Pedro Nicolaci da Costa in Washington; Editing by Dan Grebler)

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