Sunday, March 23, 2008

Spending Probably Slowed, Home Sales Fell: U.S. Economy Preview

By Courtney Schlisserman

March 23 (Bloomberg) -- Spending by American consumers slowed in February and home sales continued to drop, signaling the biggest housing slump in a generation has brought the U.S. expansion to a halt, economists said before reports this week.

Spending was up 0.1 percent last month, the smallest gain in more than a year, according to the median estimate of economists surveyed by Bloomberg News ahead of a Commerce Department report due March 28. Combined sales of new and existing homes dropped to the lowest level in at least nine years, government and private figures may also show.

``The economy is likely in the throes of recession,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``We will face a deteriorating labor market, weak household income creation and a pullback in consumer spending.''

The collapse in subprime lending will continue to ripple through the economy as property values fall, banks shut off access to credit and payrolls shrink. The worsening outlook indicates the Federal Reserve will keep lowering interest rates to stabilize financial markets and promote lending.

``Because market interest rates have been stubbornly sticky, the Fed probably has to make even more rate cuts,'' LaVorgna said.

The biggest job losses in five years and record fuel costs are eroding consumer confidence and spending. Retail sales unexpectedly fell in February, paced by declines in purchases of autos, furniture, appliances and restaurant meals. The 0.6 percent drop followed a 0.4 percent gain in January, the Commerce Department said March 13.

Services, Incomes

This week's Commerce Department spending report includes figures on purchases of services, such as utilities and medical care, not tracked by retail sales. The report is also forecast to show personal income rose 0.3 percent in February for a second month, according to the survey median.

The Fed last week lowered the benchmark overnight lending rate between banks by three-quarters of a percentage point to 2.25 percent. The rate has been reduced a total of 3 percentage points since September. Policy makers also said recent reports showed the economic outlook had ``weakened further.''

The cuts ``are definitely serious medicine for the economy which is very sick,'' Michael Jackson, chief executive officer of AutoNation Inc., the largest publicly traded U.S. car dealer, said in a March 19 interview with Bloomberg Television. ``The consumer is under extreme stress.''

Drop in Auto Sales

Jackson said he expected a ``double-digit'' decline in auto industry retail sales this year after decreases of 6 percent in each of the last two years.

The slump in home sales is also not abating. Purchases of existing houses fell 0.8 percent last month to an annual pace of 4.85 million, the lowest level since at least 1999, economists forecast the National Association of Realtors will report tomorrow. The group's combined figures for houses and condominiums go back only nine years.

Sales of new homes, due from the Commerce Department on March 26, fell to an annual pace of 579,000 in February, the fewest in 13 years, according to the survey median.

``We still have tight credit conditions and we still have widespread expectations that prices will fall, so that points to declines in both existing and new home sales,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York.

Residential construction is down 29 percent since reaching a peak in the last three months of 2005, the biggest drop since 1982, according to figures from Commerce.

Prolonged Slump

The economy this quarter is projected to expand at a 0.1 percent pace, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

The slump is likely to extend through the middle of the year, according to a forecast issued March 20 by the Paris-based Organization for Economic Cooperation and Development. The U.S. economy may not grow at all in the second quarter, the agency said.

Americans are growing more pessimistic as the economy falters. The Conference Board is scheduled to report on March 25 that its consumer confidence index fell this month to 73.8, the lowest reading since the start of the Iraq war five years ago, according to the survey median.

The Reuters/University of Michigan's final reading on sentiment for this month, due March 28, is projected to decline to a 16-year low of 70, the survey showed.

Finally, economists forecast orders for long-lasting goods, such as autos and machinery, rose 0.8 percent in February, led by a rebound in bookings for commercial aircraft. Excluding orders for transportation equipment, which tend to be volatile, the Commerce Department's March 26 report is forecast to show demand dropped 0.3 percent, a second consecutive decline.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
Exist Homes Mlns 3/24 Feb. 4.89 4.85
Exist Homes MOM% 3/24 Feb. -0.4% -0.8%
Case Shiller Monthly YO 3/25 Jan. -9.1% -10.5%
Case Shiller Monthly In 3/25 Jan. 184.9 181.4
Consumer Conf Index 3/25 March 75.0 73.5
Durables Orders MOM% 3/26 Feb. -5.1% 0.8%
Durables Ex-Trans MOM% 3/26 Feb. -1.5% -0.3%
New Home Sales ,000's 3/26 Feb. 588 578
New Home Sales MOM% 3/26 Feb. -2.8% -1.7%
GDP Annual QOQ% 3/27 4Q F 0.6% 0.6%
Initial Claims ,000's 3/27 23-Mar 378 370
Cont. Claims ,000's 3/27 16-Mar 2865 2900
Pers Inc MOM% 3/28 Feb. 0.3% 0.3%
Pers Spend MOM% 3/28 Feb. 0.4% 0.1%
PCE Deflator YOY% 3/28 Feb. 3.7% 3.5%
Core PCE Prices MOM% 3/28 Feb. 0.3% 0.1%
Core PCE Prices YOY% 3/28 Feb. 2.2% 2.1%
U of Mich Conf. Index 3/28 March F 70.5 70.0

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