Home Sales Probably Fell, Trade Gap Ebbed: U.S. Economy Preview

Home Sales Probably Fell, Trade Gap Ebbed: U.S. Economy Preview


Oct. 5 (Bloomberg) -- The U.S. housing slump probably showed no sign of ending and the trade deficit shrank in August, a month before the turmoil in financial markets came to a head, economists said before reports this week.

The number of Americans signing contracts to purchase previously owned homes probably fell 1.1 percent in August, according to the median estimate in a Bloomberg News survey ahead of Oct. 8 figures from the National Association of Realtors. The drop in oil prices caused imports to fall, narrowing the trade gap, a report two days later may show.

Job losses swelled last month, stock markets tumbled as commercial and investment banks collapsed, and money-market rates jumped to records as the credit crisis intensified. Passage of the government's $700 billion rescue plan failed to ease concern the economy will falter, signaling the Federal Reserve may need to lower interest rates.

``The economy was on the way down even before the latest tightening in the credit crunch,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The economy's tailspin and the tightening of the credit noose argue strongly for interest-rate cuts'' by the Fed.

Pending home sales may have declined in August for a second month, the first back-to-back drop since March. A slowdown in demand will add to the glut of unsold houses, pushing property values down even more.

Home Prices

A private report last week showed home prices in 20 U.S. cities declined at the fastest pace on record in the year ended July. The S&P/Case-Shiller home-price index dropped 16.3 percent from July 2007.

Declining home prices threaten to throw more properties into foreclosure, prompting banks to keep reining in credit.

KB Home, the fifth-largest U.S. homebuilder by revenue, last month reported wider than forecast third-quarter losses after sales plummeted 56 percent compared with the same period a year earlier.

``Market fundamentals appear unlikely to improve significantly in the near term, as foreclosures continue to rise, housing inventory overhang remains at historically high levels and mortgages have become more difficult to obtain,'' Chief Executive Officer Jeffrey Mezger said in a statement Sept. 26.

Congress last week passed the administration's rescue package that lets the government buy troubled assets from financial institutions damaged by the subprime crisis. President George W. Bush signed the measure into law Oct. 3.

Payrolls Drop

Employers cut 159,000 workers from payrolls in September, the most since 2003, and the unemployment rate was unchanged at a five-year high of 6.1 percent, the Labor Department said last week.

Odds the central bank will lower its benchmark rate, currently at 2 percent, by at least a half percentage point between now and its next meeting on Oct. 29 rose to 100 percent on Oct. 3 compared with no chance a month earlier.

The trade gap probably shrank 5.1 percent to $59 billion from $62.2 billion in July, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures on Oct. 10.

The cost of a barrel of crude oil averaged $119.77 in August, down from $132.04 in July. Prices have retreated further since then, dropping below $92 a barrel last week.

Exports, Growth

While the decline in the trade gap reflects forecasts for a drop in oil imports, economists will also be looking for evidence that American exports are starting to suffer as economies in the euro zone and Japan falter.

A stronger dollar is also making U.S. products less competitive. The dollar has gained nearly 7 percent since Aug. 1 against a trade-weighted basket of currencies of major trading partners.

Import prices are projected to drop 2.8 percent in September after a 3.7 percent drop the prior month, a Labor Department report Oct. 10 may show according to the Bloomberg survey.

Less inflation may give Fed officials scope to lower interest rates to alleviate the credit crisis that brought down Lehman Brothers Holdings Inc., American International Group Inc. and Washington Mutual Inc.

BLOOMBERG