U.S. Economy: Home-Price Drop Accelerates, GDP Falls

U.S. Economy: Home-Price Drop Accelerates, GDP Falls

Nov. 25 (Bloomberg) -- The decline in U.S. house prices accelerated in September and the economy shrank in the third quarter at a faster pace than first estimated as the grip of the credit crunch tightened.

The S&P/Case-Shiller home-price index fell 17.4 percent from a year earlier. The Commerce Department said gross domestic product dropped an annual 0.5 percent as household spending slid the most since 1980. While consumer confidence rose this month, the Conference Board’s gauge remained near the lowest on record.

“The economy is turning down pretty dramatically,” Treasury Secretary Henry Paulson said at a press conference in Washington to outline new government efforts to unfreeze credit. “It’s very important that lending continue to be available.”

Today’s reports underscore concerns that the economy is at risk of a contractionary spiral as lenders cut back credit, causing spending to fall and companies to slash investments and payrolls. The Treasury and Federal Reserve today began two new programs to bring down interest rates on mortgages and consumer loans, committing at least $800 billion.

Stocks climbed on the Fed’s plans, with the Standard & Poor’s 500 Stock Index rising 0.7 percent to close at 857.39, posting its first three-day gain since September. Treasuries rose after the central bank’s proposal to buy up to $600 billion of debt issued or backed by housing-finance companies spurred some investors to buy government securities as a hedge.

Economists anticipate that the drop in GDP worsened in the current quarter because of the deepening credit crunch. The collapse of Lehman Brothers Holdings Inc. in September triggered a renewed bout of turmoil, forcing the Fed to step up as a lender of last resort.

‘Ugly’ Quarter

“It’s the fourth-quarter numbers that are really going to look ugly,” Joel Naroff, president of Naroff Economic Advisors Inc. and most accurate forecaster in a 2008 Bloomberg News survey of economists, said in a Bloomberg Television interview.

Home prices decreased 1.8 percent in September from the prior month, the biggest one-month drop since March, the S&P/Case-Shiller report showed.

S&P/Case-Shiller also released quarterly figures for nationwide home prices. That measure showed a 16.6 percent drop in the three months through September from the same time last year, compared with a 15.1 percent drop in the second quarter.

Economists forecast the 20-city index would fall 16.9 percent from a year earlier, according to the median of 28 estimates in a Bloomberg News survey. Projections ranged from declines of 16 percent to 17.2 percent.

Broad Decline

Compared with a year earlier, all areas in the 20-city survey showed a decrease in prices in September, led by a 31.9 percent drop in Phoenix and a 31.3 percent decline in Las Vegas.

A separate government report confirmed the decline in property values accelerated. Home prices fell 1.3 percent in September from the previous month, the biggest one-month drop since records began in 1991, the Federal Housing Finance Agency said today.

The GDP report showed consumer spending, which accounts for more than two-thirds of the economy, dropped at a revised 3.7 percent annual rate in the third quarter, more than the 3.1 percent decrease estimated by Commerce last month.

Wage figures showed a smaller gain than previously estimated in the second quarter, reflecting the weakening job market. Salaries grew $13.3 billion, $37.3 billion less than Commerce had projected.

Retailers ranging from Best Buy Co. to Nordstrom Inc. are cutting revenue forecasts ahead of what may be the worst holiday shopping season in years.

‘Difficult Times’

“In 42 years of retailing, we’ve never seen such difficult times for the consumer,” Brian Dunn, Best Buy’s president and chief operating officer, said in a statement last week. “People are making dramatic changes in how much they spend, and we’re not immune from those forces.”

The Conference Board’s index of consumer confidence climbed to 44.9, the second-lowest reading since 1974, from a record low 38.8 the prior month, the private New York-based research group said today.

The improvement reflected expectations that the economic situation wouldn’t get much worse. The gauge of the outlook for the next six months increased to 46.7 from 35.7. The Conference Board’s measure of present conditions dropped to 42.2, the lowest since June 1993, from 43.5.

“The consumer is hunkered down,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. “We are still expecting a contraction in consumer spending in the fourth quarter.”

Americans may pull back further after employers fired 240,000 workers in October and the unemployment rate jumped to the highest level since 1994.

Xerox Corp., the world’s largest maker of high-speed color printers, is eliminating 3,000 jobs and trimming manufacturing costs to save $200 million next year. Chief Executive Officer Anne Mulcahy yesterday said at a conference that Xerox isn’t projecting “any quick economic turnaround” in 2009.

BLOOMBERG