U.S. Economy: Growth Is Faltering After 4.9% Surge (Update3)

By Shobhana Chandra


Nov. 29 (Bloomberg) -- The U.S. economy is faltering after a third-quarter expansion as new-home prices dropped the most since 1970 and jobless claims rose to a nine-month high.

The figures are consistent with a report from the Federal Reserve yesterday that showed a slowing expansion. Traders are certain the central bank will reduce interest rates again next month, which would mark the deepest cut in borrowing costs since 2001.

The odds of recession ``are much too close for comfort,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto, who correctly forecast that third-quarter growth would be revised to 4.9 percent today. ``We are likely to see growth of less than 1 percent in the fourth quarter.''

The median price of a new house dropped 13 percent to $217,800 in October from a year earlier, the Commerce Department said today in Washington. Homes sold at an annual rate of 728,000 in October, less than the median forecast of 750,000 among economists surveyed by Bloomberg News.

The number of Americans filing first-time claims for unemployment benefits rose to 352,000, the Labor Department reported.

The figures overshadowed the revision in third-quarter economic growth by the Commerce Department. The new rate is a percentage point higher than the 3.9 percent initially reported. The expansion may slow to about 1 percent this quarter, some economists predict.

President's Forecast

President George W. Bush's economic advisers today reduced their outlook for economic growth in 2008 to 2.7 percent from a 3.1 percent rate projected in June. The unemployment rate will rise to 4.9 percent, compared with 4.7 percent previously estimated, according to the Council of Economic Advisers' semi- annual forecast.

New home sales increased 1.7 percent from the previous month because September's purchases were revised lower. In a another report, the Office of Federal Housing Enterprise Oversight said today in Washington that prices for previously owned single- family houses fell 0.4 percent last quarter, the first decline since 1994.

``There is no question there has been another big leg down in housing in recent months,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who forecast sales would drop to a 725,000 pace. ``Prices will continue to slip.''

Market Reaction

Treasury notes extended gains after the reports. The yield on the benchmark 10-year Treasury note dropped 12 basis points to 3.91 percent at 2:24 p.m. in New York. A basis point is 0.01 percentage point.

The collapse in subprime lending and turmoil in financial markets are projected to extend the housing recession well into 2008.

September new-home sales were revised down to a 716,000 pace, the lowest in almost 12 years, from the originally reported 770,000 rate.

``The housing sector has continued to decline and to erode at a very, very rapid rate,'' Fed Vice Chairman Donald Kohn said yesterday in response to a question after a speech in New York. ``It would be nice to see some early signs that it was beginning to stabilize, and we haven't seen that yet.''

Bernanke Speech

Investors and traders await a speech from Fed Chairman Ben S. Bernanke on the economic outlook at 6:45 p.m. today in North Carolina. Kohn suggested yesterday he would be open to the possibility of lowering the target interest rate again. Central bankers next meet on Dec. 11.

The number of new homes on the market decreased 2.3 percent to a seasonally adjusted 516,000. The supply of homes at the current sales rate dropped to 8.5 months' worth from 9 months in September.

Sales of new homes were down 24 percent from the same time last year.

Purchases rose in three of four regions. They climbed 14 percent in the Midwest, 6.8 percent in the South and 1.8 percent in the Northeast. Sales dropped 16 percent in the West.

New-home purchases are considered a timelier indicator because they are based on contract signings, while existing home sales are calculated when a contract closes, usually a month or two later. New home sales account for about 15 percent of total home sales and those of existing homes account for the rest.

The worst U.S. housing slump in 16 years will drive down property values by $1.2 trillion next year and slash tax revenue by more than $6.6 billion, according to a report this week by the U.S. Conference of Mayors. The 361 largest U.S. cities will experience a combined loss of $166 billion in economic growth, it said.

Tighter Lending

Banks are tightening lending rules, buyers are waiting for bargains and the number of foreclosed properties is rising. As a result, prospects are poor for a quick recovery, executives at homebuilders D.R. Horton Inc. and Beazer Homes USA Inc. said.

Next year ``is going to be worse than '07 for us and for the industry in general,'' D.R. Horton Chief Executive Officer Donald Tomnitz said at a conference in Las Vegas this week.

Residential construction, which has subtracted from economic growth every quarter since the first three months of 2006, will remain a drag, economists said.

Fed policy makers reduced their growth forecasts when they last met on Oct. 31. They projected the economy would grow between 1.8 percent and 2.5 percent in 2008, ``notably below'' their last forecast issued in July, according to meeting minutes released Nov. 20.