US economic woes deepen

US economic woes deepen | Business Breaking News | News.com.au

November 20, 2008 08:07am

A GLUM economic outlook worsened overnight as data on US housing starts and consumer prices pointed to more weakness and deflation risks, while the Federal Reserve acknowledged the potential for a long recession.

The Labor Department reported US consumer prices fell 1.0 per cent in October, the steepest decline since the department began publishing the consumer price index (CPI) data in February 1947.

Separately, the Commerce Department said housing starts dropped 4.5 per cent to an annualised rate of 791,000 units, the lowest level since it began the report in January 1959.

Together, the reports point to an even weaker-than-expected economic picture that could take a hefty bite out of US economic activity in the fourth quarter and beyond.

"With economic growth and inflation pedaling backwards, deflation talk is deafening,'' said Jennifer Lee at BMO Capital Markets. "Tighten your seatbelts as fourth-quarter growth is going to be ugly.''

The Federal Reserve meanwhile sharply cut its outlook for the US economy for 2009, highlighting the potential for recession over the next year while leaving the door open for more rate cuts.
The latest forecast left a wide range of possibilities, suggesting the economy could grow as much as 1.1 per cent or contract by 0.2 per cent next year.

Most private forecasts are calling for a downturn in the world's biggest economy at least through mid-2009, and the International Monetary Fund is predicting a 0.7 per cent contraction for the year.

The consumer price report was dragged down by a massive 14 per cent drop in gasoline and declines in other energy costs, but prices fell in almost every other category, including apparel and lodging, with only food prices still rising.

Analysts said the report showed consumers are retrenching, forcing big declines in almost every category of spending.

"This report clearly reflects the crunch in discretionary consumers' spending, which is likely to persist for the foreseeable future,'' said Ian Shepherdson at High Frequency Economics.

Although lower prices sometimes provide welcom relief, analysts say deflation could be a further blow to a troubled economy.

"The drop in prices across the board is great news for people with money,'' said Peter Cohan, analyst and consultant with Peter Cohan & Associates.

"But the reason for the drop in prices is very ominous for the future of the economy. That's because companies have overproduced and they now have excess supply gathering dust on their shelves and showrooms.''

Mr Cohan added that the weak consumer spending and lower prices will exacerbate the weak economy.

In housing, the report was troubling since many analysts say the overall economy cannot recover until that sector stabilises. Significantly, the report showed permits to build new homes, an indicator of future activity, dropped 12.0 per cent to a pace of 708,000, the lowest level since that data was first published in January 1960, and were down 40.1 per cent from October 2007.

"Today's report suggests that housing activity will continue to decline for some time,'' said Gary Bigg at Bank of America.

"With a variety of headwinds facing the housing industry - financial market turmoil, rising unemployment and tight credit among them - a recovery in construction activity is not expected until mid-2009 at the earliest.''

The Fed said a slow recovery was expected to produce a growth rate of 2.3 to 3.2 per cent in 2010.

The forecasts were published along with the minutes of the last meeting of the Federal Open Market Committee on October 28-29, at which members agreed unanimously to slash the base lending rate a half-point to 1.0 per cent.

"Participants noted that the financial turmoil had increasingly become an international phenomenon, leading to a marked deterioration in global growth prospects,'' the minutes said.

Even with the federal funds rate at a record low of 1.0 per cent, some Fed members indicated the central bank could trim rates even more to help revive a moribund economy.

Some Fed members "suggested that additional policy easing could well be appropriate at future meetings,'' the minutes showed.

"In any event, the committee agreed that it would take whatever steps were necessary to support the recovery of the economy.''