Tuesday 25 March 2008

U.S. Economy: Confidence Slides, House Prices Decline

Consumer confidence fell more than forecast in March as Americans' outlook for the economy dropped to the lowest level since Richard Nixon was president.

The Conference Board's confidence index fell to 64.5, a five-year low, from a revised 76.4 in February, the New York- based research group said today. A report from S&P/Case-Shiller showed home prices in January fell by the most on record.

Declining stock and property values have unnerved Americans, heightening concern spending will falter. A drop in spending, which accounts for more than two-thirds of the economy, would deepen what economists say is almost certainly the second recession of the decade. The Dow Jones Industrial Average remained lower after the report, while Treasury notes held gains.

``Consumers are going to pull back pretty sharply,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``The labor market is starting to deteriorate and income growth is barely keeping pace with inflation. These are all pretty negative omens for what's to come.''

The Conference Board's gauge of expectations for the next six months slumped to 47.9, the lowest since December 1973, when the Watergate scandal rocked the Nixon administration and an embargo by a group of Arab oil exporters was in effect, the report showed.

Spending is already taking a hit. Retail sales fell 0.6 percent in February, according to figures from the Commerce Department, the second decline in three months.

Weakest Since 1991

Consumer spending may grow at an annual rate of 0.5 percent this quarter, the slowest pace since the 1991 recession, according to the median estimate of economists surveyed this month by Bloomberg News.

Economists forecast the Conference Board's measure would fall to 73.5 from a previously reported 75, according to the median of 61 forecasts in a Bloomberg News survey. Estimates ranged from 65 to 76.

Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey also showed today. The S&P/Case- Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent decrease in December. The gauge has fallen for 13 consecutive months.

The Conference Board's measure of consumers' outlook on the current situation declined to 89.2 in March from 104 the prior month.

The share of consumers who said jobs are plentiful dropped to 18.8 percent from 21.5 percent last month. Those saying jobs are hard to get increased to 25.1 percent from 23.4 percent.

Lowest Ever

The proportion of people who expect their incomes to rise over the next six months fell to 14.9 percent, the lowest since record keeping began in 1967, from 18 percent. The share expecting more jobs dropped to 7.7 percent from 8.9 percent.

``It's a discouraging environment,'' Pierre Ellis, a senior economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. ``We are almost certainly in a recession. The question is how deep and how long it will be.''

Federal Reserve policy makers have lowered the benchmark interest rates and pumped money into the banking system to try to make it cheaper and easier for Americans to borrow and spend.

The central bank earlier this month carried out its first emergency weekend action in almost three decades and became the lender of last resort to the biggest dealers in government bonds. Two days later, it reduced the target interest rate by three-quarters of a point and acknowledged risks had increased.

Fed Outlook

``Growth in consumer spending has slowed and labor markets have softened,'' the Fed said after it cut the key rate to 2.25 percent. ``The outlook for economic activity has 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.''

The number of Americans collecting jobless benefits swelled this month to the highest in more than three years as automakers, construction companies and financial firms fired workers. The economy lost 63,000 jobs in February, the most in five years, according to figures from the Labor Department.

More homes are also being foreclosed as the drop in values leaves owners owing more than a property is worth.

For those still in their homes, falling prices lead to a loss of wealth that makes Americans less inclined or able to borrow to finance spending.

What's more, regular gasoline rose to a record $3.28 a gallon on average last week and crude oil reached a record above $111 a barrel.

More and more economists are forecasting a recession. Martin Feldstein, the Harvard economics professor who heads the research group that determines when downturns begin, said this month that a contraction had already begun.