Consumer Prices, Housing Starts Post Record Slide

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The latest round of bad news can be found here.

 

By Bob Willis and Courtney Schlisserman

 

Dec. 16 (Bloomberg) -- Consumer prices tumbled the most on record in November, and builders broke ground on the fewest new homes in at least half a century, as a deepening economic contraction raised the risk of deflation.

 

The cost of living dropped 1.7 percent last month, more than economists had forecast, a Labor Department report showed in Washington. Excluding food and energy, so-called core prices were unchanged from a month earlier. Housing starts last month fell 18.9 percent to an annual rate of 625,000, the Commerce Department said.

 

Worsening residential construction means the economy will likely shrink by 6 percent or more this quarter, the most since the early 1980s, some analysts said. The figures help to build the case for the Federal Reserve to lower its key interest-rate target to a record today, and signal willingness to step up its injections of cash to avert a depression.

 

“Just as housing continues to fall faster and farther than most thought possible, we wonder if that might be true with the broader economy as well,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc., which downgraded its fourth-quarter gross domestic product forecast to a drop of as much as 8 percent after today’s housing report. Risks of deflation “are increasing on the horizon.”

 

Democratic lawmakers are seeking a new effort to address the housing crisis, which last year triggered the collapse in credit markets that has caused almost $1 trillion of writedowns and losses at financial firms. President-elect Barack Obama, who has committed to stem mortgage foreclosures and enact a two-year fiscal stimulus, meets with his economic team later today.

 

Yields Fall

 

Treasuries rallied, sending benchmark 10-year note yields to their lowest level since the Fed’s daily records began in 1962. The Standard & Poor’s 500 Stock Index advanced ahead of today’s Fed meeting, gaining 1.6 percent to 882.04. The dollar continued its retreat since the end of last month, losing 0.6 percent against the euro to $1.3767.

 

Fed policy makers will probably lower their benchmark rate to 0.5 percent, from 1 percent, according to the median forecast of economists surveyed by Bloomberg News. The central bank’s statement is expected about 2:15 p.m. in Washington.

 

As the recession spreads around the globe, commodity prices have collapsed, spurring decreases in consumer prices. Five straight months of declines in U.S. retail sales have also prompted stores to use discounts to draw in reluctant buyers, who have been hammered by a record drop in household net worth.

 

Bigger Than Forecast

 

Consumer prices were forecast to fall 1.3 percent, according to the median forecast of 71 economists in a Bloomberg survey. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed. The monthly drop in the CPI was the biggest since the Labor Department’s records began in 1947.

 

Prices increased 1.1 percent in the 12 months to November, after a year-over-year gain of 3.7 percent in October. They were forecast to climb 1.5 percent from a year earlier, according to the survey median.

 

The core rate gained 2 percent from November 2007, after a 2.1 percent year-over-year increase the prior month.

 

Energy costs in November dropped 17 percent, the most since 1957, today’s CPI report said. Gasoline prices plunged 29.5 percent, and fuel oil costs fell 14.6 percent. Natural gas prices declined 5.2 percent from a month earlier.

 

The drop in oil prices has continued this month. Crude oil futures on the New York Mercantile Exchange fell as low as $40.50 in intraday trading on Dec. 5 after averaging $57.44 in November.

 

Food prices, which account for about a fifth of the CPI, gained 0.2 percent last month after a 0.3 percent increase in October.

 

Auto Sales

 

New-vehicle prices declined 0.6 percent in November and clothing costs increased 0.3 percent. The price of airfares fell 4 percent in November from a month earlier.

 

The cost of medical care gained 0.2 percent, while housing costs dropped 0.1 percent, the report showed.

 

The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the government’s broadest gauge of costs because it includes goods and services.

 

Prices paid to U.S. producers fell for a fourth month in November, sliding 2.2 percent, the government said last week. Import costs last month decreased by the most on record due to falling energy prices, Labor figures showed last week.

 

The recession, already a year long, will continue to slow inflation. Consumer prices will probably rise just 0.7 percent in the 12 months ended in September 2009, the smallest year- over-year gain since 1962, according to economists surveyed last week by Bloomberg News.

 

Housing Slump

 

American consumers are scaling back purchases as the value of homes declines, hurting the market for new construction. Today’s Commerce Department report showed an annual rate of housing starts that was lower than all 70 estimates in a Bloomberg survey of economists.

 

“The horrifying thing about the housing-starts number is we’re likely to keep going down from here,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “We are just plunging like a stone and there is more to come.”

 

Building permits, an indicator of future residential projects, declined 15.6 percent to a 616,000 pace, also the lowest on record.

 

Construction of single-family homes dropped 16.9 percent to a record-low 441,000 rate, today’s Commerce report showed. Work on multifamily homes, such as townhouses and apartment buildings, fell 23.3 percent from the prior month to an annual rate of 184,000.

 

Housing starts declined in all regions of the country, led by a drop of 34.6 percent in the Northeast.

 

To contact the report responsible for this story: Bob Willis in Washington at bwillis@bloomberg.net; Courtney Schlisserman in the New York newsroom cschlisserma@bloomberg.net

 

Last Updated: December 16, 2008 11:10 EST