Fed proposes mortgage rules to protect borrowers

Dec 19, 2007 - Lenders would have to confirm that a borrower can afford a mortgage before making the loan under protections proposed by the Federal Reserve on Tuesday following the havoc wrought by the US sub-prime loan crisis.

The proposals are intended to replace loose standards that have put many Americans at risk of losing their homes because they took out loans they could not afford and may not have fully understood.

The new rules will not assist today's struggling homeowners but would give consumers the right to sue mortgage lenders who act unfairly and deceptively in preparing loans. Millions of Americans who stretched to buy homes in recent years face the risk of foreclosure as mortgages with initial 'starter' rates reset sharply higher.

The Fed's board of governors unanimously approved the standards recommeded by its consumer rights staff and said they strike a balance by protecting consumers while preserving their access to credit.

'These new rules, once adopted, would apply to all mortgage lenders,' Fed Chairman Ben Bernanke said as the board met to consider the proposal. He said the rules would be 'consistently applied and vigorously enforced' by state and federal regulators.

The new rules would put the nation's 50,000 mortgage brokers under some federal supervision, according to Fed staff.

The proposal was criticised by several leading lawmakers and praised by an industry group.

The Fed has been faulted for failing to use all its consumer protection authority during the housing boom that ended in 2005, and lawmakers are threatening to take back some of those powers.

The proposed regulations would require that lenders confirm a borrower can afford a home loan by verifying his income and assets with tax records, payroll receipts and other documentation. That is aimed at ending the recent practice of so-called 'stated income' loans in which borrowers could state a particular income without anything to back the claim up.

The proposals would also limit the penalties imposed when a borrower pays off a home loan early. No 'prepayment penalty' would apply, for instance, if a loan is refinanced less than 60 days before its interest rate resets higher.

The proposed rules also would require that borrowers receive details on their brokers' compensation and be billed monthly for annual charges, such as property tax and insurance, that are placed in escrow.

The Fed plan also contains sweeping new standards for home appraisers and targets abusive practices by loan servicers.

The proposed regulations protect borrowers with interest rates of more than 3 percentage points above Treasury securities of similar duration. For example, a 30-year Treasury bond yields around 4.55 percent, and so a 'high-cost' 30-year mortgage loan today would have an interest rate of 7.55 per cent or higher.

Several leading lawmakers said the new rules were too little, too late and suggested Congress should assume some of the Fed's consumer protection role.

Senate Banking Committee Chairman Christopher Dodd faulted the Fed for limiting mandatory escrow to the mortgage's first year and opening only a two-month window of prepayment protection.

'It raises serious questions as to whether the Federal Reserve is the appropriate institution to house consumer protection functions,' the Connecticut Democrat said.

Mr Dodd, a Democratic presidential hopeful who has sponsored legislation aimed at reforming sub-prime mortgage lending, said legislative action was needed to help protect homeowners from 'abusive and predatory lending practices'. The Senate has yet to act on his legislation, but the House of Representatives has passed a bill aimed at curbing predatory lending practices.

The American Bankers Association praised the Fed for setting standards that could reach mortgage lenders who used Wall Street money to dive into the market and generally loosened standards more than depositor-backed institutions.

The proposed regulations will be open to public comment for 90 days before the Fed staff proposes final rules. At that point, there will be another public comment period, pushing final adoption well into next year.

Fed Lowers Rate by a Quarter Point to 4.25 Percent

Dec. 11 (Bloomberg) -- The Federal Reserve lowered its benchmark interest rate by a quarter point to 4.25 percent, while signaling officials are open to further cuts if the housing slump and credit squeeze worsen.

Stocks fell and Treasury notes surged after the decision, which some economists said fell short of what's needed to spur lending and avert a recession. The central bank also pared the discount rate by a quarter point to 4.75 percent, counter to speculation among investors that the Fed would make a deeper reduction.

``Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,'' the Federal Open Market Committee said in a statement after meeting today in Washington. Lower borrowing costs ```should help promote moderate growth over time.''

The Fed dropped language from its previous statement that risks of slower growth and faster inflation were ``roughly'' balanced. The economy is faltering after a third-quarter surge as house prices drop, consumer spending slows and banks tighten lending standards for even their best customers.

Policy makers are actively considering steps to ease credit in financial markets, and haven't ruled out moves to increase liquidity before their next scheduled meeting on Jan. 29-30.

``If things deteriorate they will cut again,'' said Stephen Cecchetti, professor of international economics at Brandeis University in Waltham, Massachusetts, and a former director of research at the New York Fed. ``If financial conditions don't start to improve dramatically,'' officials might have to cut before their January gathering, he said.

Discount Rate

The gap between the discount rate, which the Fed charges for direct loans, and the federal funds rate, the rate banks charge each other for overnight loans, remains half a point.

``Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,'' the FOMC said. ``The committee will continue to assess the effects of financial and other developments in economic prospects and will act as needed to foster price stability and sustainable economic growth.''

The central bank also said some ``inflation risks remain,'' and probably was reluctant to reduce borrowing costs at all, said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute in Washington.

Rosengren Rebels

Today's decision, which matches the median forecast of economists surveyed by Bloomberg News, wasn't unanimous. Boston Fed President Eric Rosengren voted in favor of a half point cut.

Rosengren has a background in banking, having formerly headed the Boston Fed's banking supervision department. His research focused on financial crises including New England's credit crunch in the early 1990s and Japan's bad-loan debacle last decade.

The Dow Jones Industrial Average slumped 2.1 percent to 13,432.77, while the yield on the two-year Treasury note -- among securities most sensitive to official interest rates -- fell about a quarter-percentage point to 2.92 percent at the close in New York.

``When stocks go into a tailspin after you release your press statement, you know as a central banker that you didn't meet the market's expectations,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``There were rumors today about the possibility of 50 basis points, so that was a modest disappointment.''

Policy Under Bernanke

The benchmark rate is now at the lowest level since January 2006. Ben S. Bernanke, 53, who succeeded Alan Greenspan as chairman the following month, continued a series of increases that lifted the federal funds rate to 5.25 percent by June last year.

Policy makers held their ground until August this year, when the collapse in assets backed by subprime mortgages roiled markets around the world and forced central banks to pump billions of dollars into the banking system. It also spurred the Fed to start cutting the federal funds rate in September. The Fed was joined last week by the Bank of Canada and Bank of England.

Investors became confident of further reductions after Bernanke and Vice Chairman Donald Kohn said in separate speeches last month that ``turbulence'' in markets could alter their outlook for growth. Fed officials estimated in October the economy would grow 1.8 percent to 2.5 percent in 2008. Rosengren said Dec. 3 that the expansion will be ``well below'' its long- term pace for the next two quarters.

Weaker Numbers

Since Fed officials made their forecasts, government reports show orders for U.S.-made durable goods fell in October, capacity-use rates in the nation's factories slipped and retail sales slowed. Payrolls increased by 94,000 jobs last month, after a 170,000 increase in October.

The economy will expand at an annual pace of 1 percent in the fourth quarter, down from 4.9 percent in the previous three months, according to the median estimate in a Bloomberg News survey of 63 economists.

The number of Americans who fell behind on their mortgage payments rose to a seasonally adjusted 5.6 percent in the third quarter, the highest in two decades, the Mortgage Bankers Association said last week. New foreclosures hit a record.

As creditors took possession of properties, the supply of unsold homes grew to a 10.8-month supply in October. Prices of previously owned homes fell 5.1 percent from a year ago, the most on record, according to the National Association of Realtors.

Across Atlantic

The credit deterioration has spread to Wall Street and commercial banks around the world that hold bonds and derivative contracts created from pools of home loans. Banks including Credit Suisse Group in Zurich and London-based Barclays Plc are among lenders that have marked down more than $50 billion on losses linked to U.S. home loans.

Because banks are protecting capital, lending has been cut and concerns about counter-party risk are higher. About 40 percent of lenders have increased their standards for the most creditworthy borrowers to qualify for a so-called prime loan, according to a Fed study in October.

Throughout the rate cutting-cycle, Fed officials have highlighted longer-term inflation risks in their statements and their public remarks. Oil prices hit a record $99.29 a barrel in New York on Nov. 21, and traded at $89.21 this morning.

The Fed's preferred gauge, the personal consumption expenditures price index excluding food and energy, rose 1.9 percent in October from a year ago. The index has remained below 2 percent since June.

Fed Lowers Rate by a Quarter Point to 4.5 Percent

Oct 31, 2007 - The Federal Reserve cut its benchmark interest rate by a quarter point to 4.5 percent and signaled it's reluctant to lower borrowing costs further.

The second reduction in as many months should help the U.S. economy withstand the fallout from August's credit collapse, the Federal Open Market Committee said in a statement after meeting today in Washington. ``After this action, the upside risks to inflation roughly balance the downside risks to growth.''

The language ``has all the subtlety of a sledgehammer,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. ``The FOMC has just stated unequivocally that `we think we are done easing.' Whether they are or not remains to be seen, but the message is loud and clear.''

Hours earlier, the Commerce Department said economic growth accelerated to an annual pace of 3.9 percent in the third quarter, the fastest in more than a year. The Fed statement also warned that higher energy and commodity prices may spur faster inflation.

Stocks fell in the minutes after the Fed announcement, before resuming their rally. Treasury notes declined and the dollar weakened.

The Fed acknowledged that ``economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.'' At the same time, ``the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.''

Hoenig Dissents

Today's decision wasn't unanimous. Kansas City Fed President Thomas Hoenig preferred no change, the first dissent since December.

The Fed also lowered the discount rate, the cost of direct loans to banks, by 25 basis points to 5 percent, from 5.25 percent. A basis point is 0.01 percentage point.

``Unless the incoming data signal a net increase in downside growth risk, they think they are done,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. ``Inflation worries -- oil and commodities -- just won't go away.''

Policy makers have now lowered their target rate for overnight loans between banks by 0.75 percentage point in six weeks, the most aggressive easing since the economy was emerging from its last recession in 2001.

Odds of a quarter-point cut in the benchmark rate at the Dec. 11 meeting receded to 40 percent, from 66 percent yesterday, according to futures contracts quoted on the Chicago Board of Trade.

Economists and former officials said before the meeting that the central bank would want to preserve leeway to take back the rate cuts should the economy weather the risks from credit and housing markets. Vice Chairman Donald Kohn said Oct. 5 the Fed must be ``nimble in adjusting policy to promote'' both growth and price stability.

Insurance

Chairman Ben S. Bernanke, 53, and other officials in speeches this month have described the importance of taking out insurance to protect the economy from risks when the outlook is difficult to judge.

``Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes,'' Bernanke said in an Oct. 19 speech on recent economic research. Chicago Fed President Charles Evans said Oct. 22 that ``at times we may need to adopt a risk management approach to policy'' to guard against threats to growth or inflation.

Consumer-price increases have slowed, while a falling dollar and rising oil costs threaten a renewed acceleration. The Fed's preferred gauge, the personal consumption expenditures price index excluding food and energy, probably rose 1.8 percent in September from a year ago, according to the median forecast. The Commerce Department reports the figures tomorrow.

The index remained below 2 percent from June to August. Bernanke, before taking the Fed's helm, said his ``comfort'' range for the measure was 1 percent to 2 percent.

Faster Expansion

The Commerce Department said today that the expansion picked up in the third quarter, though economists surveyed by Bloomberg predict a slowing this quarter. A private report showed companies hired 106,000 this month after creating 61,000 jobs in September.

The economy grew at a 3.9 percent annual rate in July to September, up from 3.8 percent in the previous three months, Commerce figures showed. It will slow to a 1.8 percent pace in the current period, according to the median estimate in a survey published Oct. 10.

Housing Downturn

Housing figures this month showed the industry has yet to find a bottom. A private survey yesterday showed home values in 20 metropolitan areas slid the most in at least six years. Sales of previously owned homes fell to the lowest level since National Association of Realtors began keeping records in 1999, and government figures recorded a 14-year low for housing starts.

Continued stress in credit markets may lengthen the housing recession and temper business investment plans. The world's largest banks and securities firms announced more than $30 billion of third-quarter charges.

Citigroup Inc. the biggest U.S. bank, said Oct. 15 that earnings fell 57 percent as loan losses increased. Merrill Lynch & Co. last week wrote down the value of subprime mortgages, asset-backed debt and leveraged loans by $8.4 billion.

The benchmark rate is now at the lowest level since January 2006. Bernanke took office the following month, and continued a series of rate increases that lifted the federal funds rate to 5.25 percent by June last year.

U.S. Economy: Retail Sales Ease Recession Concerns

Oct 12, 2007 - Retail sales in the U.S. blew past economists' forecasts last month, reducing concerns that a housing-fueled consumer slowdown might drag the economy into recession.

The 0.6 percent increase was double the previous month, the Commerce Department said today in Washington, and three times the size predicted by analysts in a Bloomberg News survey. Separately, the Labor Department said core producer prices, which exclude food and energy, rose less than anticipated.

The retail report spurred investors to pare bets that the Federal Reserve will continue cutting interest rates to keep the economy growing.

"The pessimism that's been so widely spread about collateral damage from housing hasn't been realized," said Richard DeKaser, chief economist at National City Corp. in Cleveland, Ohio. "The downside risks so feared a month ago have diminished."

Bonds recouped some of their losses after the Reuters/University of Michigan preliminary index of consumer sentiment fell to 82.0 from 83.4 in September. The gauge compares with an average 89.6 in the first half of the year.

"It matters more what consumers do than what they say," said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley's Global Wealth Management Group. "The decline in confidence is not spilling over into a significant retrenchment in spending."

Purchases excluding automobiles rose 0.4 percent, compared with a decline of 0.4 percent in August.

Wholesale Prices

The 0.1 percent increase in core wholesale prices eased concern that rising fuel and food costs would filter through the economy. Overall prices increased 1.1 percent as oil costs climbed.

The yield on the benchmark 10-year Treasury was 4.68 percent at 4:54 p.m. in New York. Earlier, the yield increased as high as 4.69 percent in the minutes after the retail figures were released. The Dow Jones Industrial Average rose 78 points, or 0.56 percent, to close at 14,093.1.

Inventories at U.S. businesses rose a less-than-forecast 0.1 in August, a separate report from the Commerce Department also showed. Economists said companies are holding back on production and spending as they gauge the effect on demand from the deepening housing slump.

Today's retail sales report showed purchases at automobile dealerships and parts stores rose 1.2 percent after climbing 3.3 percent in August.

Electronics, Groceries

Sales at electronics and appliance stores rose 0.9 percent, and purchases at food and beverage merchants increased 0.8 percent. Americans also spent more to fill up their gasoline tanks. Filling station sales increased 2 percent in September after dropping 2.6 percent in August.

The report also reflected the effects of the decline in the housing market and the weakness reported yesterday in sales at chain stores. Furniture sales dropped 0.6 percent and building materials gained just 0.1 percent. Clothing weakened 0.4 percent and purchases at department stores fell 0.5 percent.

Yesterday's chain-store figures account for about 17 percent of total retail sales, which in turn make up almost half of all consumer spending.

Wal-Mart, the world's largest retailer, posted a 1.4 percent gain in September same-store sales, at the lower end of its forecast. Company officials cited softer demand for home goods and said consumers remained ``concerned with their finances, the cost of living and gas prices.''

Department Stores

Macy's Inc. and J.C. Penney Co. said sales declined. Nordstrom, among the few chains to post a gain, fell short of analysts' estimates.

"Unseasonable weather in large areas of the country and the well-chronicled issues affecting the housing market impacted our sales for the September period," J.C.Penney Chief Executive Officer Myron Ullman said in a statement yesterday.

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales rose 0.3 percent, following little change the month before. The government uses data from other sources to calculate the contribution from the three categories excluded.

Economists had forecast producer prices would rise 0.5 percent, according to the median of 73 projections. Core prices were forecast to rise 0.2 percent.

Over the past 12 months, producer prices rose 4.4 percent, compared with a 2.2 percent rise in the 12 months through August. Producer prices excluding food and energy rose 2.0 percent in the year through September.

Fed's Preference

Fed policy makers, including Chairman Ben S. Bernanke, have said they prefer to look at core price measures to gauge underlying trends in inflation.

Faced with rising commodity costs, some companies are raising prices to maintain their profit margins.

Kimberly-Clark Corp., the maker of Huggies diapers, said Oct 9 it's raising prices in the U.S. 4 percent to 7 percent on Feb. 3 to counter higher raw material and energy costs. The increases will affect products in the company's consumer tissue and baby and childcare businesses, the Dallas-based company said in a statement.

"The increases are necessary to offset significant inflationary pressure from higher raw material and energy costs," the company said.

Some companies aren't passing on all their cost increases to consumers.

"We pass on a lower rate of price increases to consumers than we are feeling in our input costs," said Stephen Sanger, chairman of food processor General Mills Inc. yesterday at the annual Business Council meeting in Williamsburg, Virginia.

U.S. August Trade Deficit Narrowed More Than Forecast

Oct 11, 2007 - The U.S. trade deficit narrowed more than forecast in August as exports climbed to a record for a sixth consecutive month.

The gap shrank 2.4 percent to $57.6 billion, the smallest since January, from a revised $59 billion in July, the Commerce Department said today in Washington.

Foreign companies, benefiting from growing demand and a weaker dollar that's made American goods less expensive, have been snapping up Boeing Co. aircraft and General Electric Co. turbines. Rising exports will help keep the economy from falling into recession even as the housing slump persists.

"Strong global demand is going to be a very important source for U.S. economic growth," said Meny Grauman, an economist at Scotia Capital in Toronto who forecast the trade balance would narrow to $58 billion. "We see ongoing strength in exports and ongoing softness on the domestic side."

Economists had forecast the deficit would narrow to $59 billion, from a previously reported $59.2 billion in July, according to the median of 74 forecasts in a Bloomberg News survey. Estimates ranged from $57 billion to $62.3 billion.

Prices of goods imported into the U.S. rose 1 percent in September as costs for oil shipped from overseas jumped to a record, a Labor Department report also showed. Prices excluding oil fell 0.2 percent, the biggest drop since October 2006.

Fewer Claims

A separate report from Labor showed the number of workers filing first-time claims for unemployment benefits declined more than forecast to 308,000 last week.

The trade report showed exports rose 0.4 percent to $138.3 billion, led by demand for food and industrial supplies such as cotton and metals. Imports fell 0.4 percent, the first decline since April, to $195.9 billion.

A jump in petroleum costs prevented imports from dropping even more in August. Petroleum import prices rose to a record $68.09 a barrel.

Rising oil prices may keep the trade imbalance from shrinking in coming months. Crude oil futures reached a record close of $83.32 on the New York Mercantile Exchange on Sept. 20 and have remained near that level since.

The government excludes the effect of prices on trade when calculating its impact on economic growth. On that basis, the gap shrank to $52 billion, the smallest since February 2004.

Trade's Contribution

The U.S. is scheduled to release its advance estimate of third-quarter growth on Oct. 31. Net exports added 1.32 percentage points, the most in more than a decade, to the second-quarter's 3.8 percent growth rate.

A weaker dollar is supporting exports by making U.S. goods cheaper abroad. The dollar is down more than 10 percent since the beginning of 2006 against a basket of currencies of major trading partners, according to Federal Reserve figures.

Also, growth in other countries is outpacing that of the U.S. The economy in countries that use the euro expanded 2.5 percent in the year ended in June, and China grew 12 percent, compared with a 1.9 percent increase in the U.S.

"International is a great opportunity for us," NCR Corp. Chief Executive Officer Bill Nuti said in an interview Sept. 26.

NCR will focus on boosting overseas sales of products such as self-service grocery checkout machines, Nuti said.

GE Turbines

GE, the world's biggest maker of turbines for power plants, said Oct. 8 it will supply six gas-turbine generators and related services to Electricitie de France SA, an agreement valued at more than $750 million. The Fairfield, Connecticut-based company projects revenue from outside the U.S. will increase to $130 billion by 2010, from $80 billion in 2006.

A cheaper dollar may also be boosting gains in tourism to the U.S. The nation's surplus in services grew to a record $9 billion in August mainly reflecting an increase in travel.

The trade deficit with China, the second-largest U.S. trading partner behind Canada, narrowed 5.4 percent to $22.5 billion in August as American companies exported a record $5.9 billion worth of goods.

Demand for American-made goods from South and Central America and from the nations in the Organization of Petroleum Exporting Countries also reached records.

Some U.S. lawmakers and manufacturers say Chinese companies have an unfair trade advantage because China keeps the value of its currency, the yuan, artificially low to stimulate exports.

The U.S. wants China to 'accelerate' its efforts to make its currency more flexible, Allan Hubbard, director of President George W. Bush's National Economic Council, said in an interview on Oct. 5.

US consumer spending up 0.6%; incomes rise 0.3%

Sep 28, 2007 - US consumer spending rose 0.6 per cent in August as Americans shrugged off credit and housing market turmoil, government data showed on Friday.

The Commerce Department report was better than the 0.4 per cent rise expected by Wall Street analysts and showed that a key driver of US economic activity remained strong.

Personal income however rose a more modest 0.3 per cent, slightly below expectations of a 0.4 per cent gain.

A key inflation gauge in the report known as the personal consumption expenditures price index fell 0.1 per cent in August, and shows a 1.8 per cent rise over the past 12 months.

Core inflation, which excludes volatile food and energy costs, rose 0.1 per cent in August and 1.8 per cent in the past year.

Real disposable incomes, which are inflation-adjusted and measure income after taxes, rose 0.4 per cent in August after rising 0.5 per cent in July.

The report suggested that consumer spending, which represents two-thirds of US economic activity, held up in August even as credit conditions tightened in the face of concerns about a wave of failures of sub-prime mortgages.

U.S. Q2 GDP Growth Revised Down to 3.8%

Sep 27, 2007 - The Department of Commerce released its final report on second quarter gross domestic product Thursday morning, showing that the annual rate of GDP growth in the quarter was downwardly revised a little more than economists had expected.

The report showed that GDP growth in the second quarter was revised down to 3.8 percent from the preliminary estimate of 4.0 percent growth. Economists had expected GDP growth for the quarter to be revised down to 3.9 percent.

The downward revision to the second quarter growth reflected an upward revision to imports and a downward revision to non-residential construction. An upward revision to spending on equipment and software helped to limit the size of the downward revision.

Despite the downward revision, the GDP growth in the second quarter still represents a significant acceleration from the 0.6 percent growth that was seen in the first quarter.

The acceleration came amid a downturn in imports as well as upturns in federal government spending and in private inventory investment. Faster export, non-residential construction, and equipment and software spending growth also contributed to the acceleration.

However, the acceleration compared to the first quarter was partly offset by a notable deceleration in the pace of consumer spending growth, which slowed to 1.4 percent in the second quarter from 3.7 percent in the first quarter.

While the report also showed a slowdown in the pace of core consumer price growth compared to the first quarter, the increase in core prices was revised up to 1.4 from the preliminary reading of 1.3 percent growth. Core consumer prices rose 2.4 percent in the first quarter.

Nonetheless, the data is likely to be seen as old news, with many traders and economists focusing on more recent data to get an indication of the broader economic impact of the recent problems in the credit market.

Last week, the Federal Reserve announced its decision to cut interest rates by 50 basis points in an effort to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in the financial markets.

The Federal Open Market Committee, the policy-setting arm of the Federal Reserve, is scheduled to make its next decision on interest rates after a two-day meeting in late October.

U.S. Economy: Durables Orders Decline by Most in Seven Months

Sep 26, 2007 - Orders for American-made jetliners, automobiles and communications gear fell in August by the most in seven months, raising concern that businesses are losing confidence in the economy.

Demand for durable goods fell a greater-than-forecast 4.9 percent, the Commerce Department said today in Washington. Excluding transportation equipment such as airplanes, orders declined 1.8 percent after a 3.4 percent gain.

The report suggests business investment, which had been forecast to make up for a slowdown in consumer spending triggered by the housing recession, may instead weaken. Falling orders reinforce economists' predictions that economic growth will slow in the final quarter.

"The report makes us a little more worried about business investment in the second half," said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. "Businesses are probably making decisions a little more deliberately than they did before the credit crunch."

Economists noted that durable goods figures are volatile, and last month's decrease followed a 6.1 percent gain in July, the biggest jump in almost a year. Treasury securities were little changed immediately after the release and later dropped.

Companies may decide to rein in spending after the meltdown in subprime lending sent financial markets reeling in August, dimming growth prospects.

Mortgage Applications

Mortgage applications fell 2.8 percent last week, led by the biggest drop in purchases since January, a report from the Mortgage Bankers Association today also showed. The group's purchase index dropped 7.3 percent, while its refinancing gauge increased 3.3 percent.

Orders for durable goods, made to last several years, were forecast to fall 4 percent, according to the median of 74 estimates in a Bloomberg News survey, after a previously reported 6 percent rise in July. Estimates ranged from a 7.9 percent decline to 1 percent gain.

Excluding transportation equipment, orders were projected to fall 1 percent, according to the survey median, after the 3.8 percent increase the government reported earlier.

Economists prefer to track the durable goods figures excluding transportation because orders for aircraft and automobiles can vary widely from month to month, obscuring underlying trends in spending.

Orders for commercial aircraft plunged 41 percent in August after increasing 13 percent a month earlier.

Boeing Co., the world's second-largest maker of commercial jets, received 75 orders in August, about half the 149 the Chicago-based company had in July, according to figures issued earlier this month. It shipped 42 planes, compared with 33 a month earlier.

Auto Strike

Demand for autos dropped 6.2 percent after an 11 percent gain the prior month that was the biggest in four years.

Auto dealers in July may have been trying to boost stockpiles ahead of a threatened strike against General Motors Corp. Detroit-based GM today reached a tentative four-year contract agreement with the United Auto Workers, ending a two- day strike. Union leaders will seek ratification this weekend and workers could return to picket lines if they reject the contract.

Non-defense capital goods orders excluding aircraft, a proxy for future business investment, fell 0.7 percent, after rising 0.9 percent in July. Shipments of those items, used in calculating gross domestic product, increased 0.8 percent after little change the prior month.

One bright spot in the report was that unfilled orders for capital equipment rose 1.2 percent, suggesting manufacturers had enough of a backlog to keep production lines busy in coming months. Inventories of all durable goods dropped 0.1 percent, the first decline since February 2006.

Lower Forecasts

Economists at Morgan Stanley in New York lowered their forecast for third-quarter growth to an annual rate of 2.2. percent following the durable goods report, from a prior estimate of 2.4 percent.

The drop in inventories 'should set the stage for an eventual pick-up in production - especially with unfilled orders continuing to surge,' said David Greenlaw, chief U.S. fixed- income economist at Morgan Stanley, in a note to clients.

The economy will grow 2 percent this year, the least since 2002, based on the median estimate of 64 economists surveyed by Bloomberg News Aug. 30 to Sept. 7. Economists projected 2.5 percent growth at the beginning of the year.

Less Confidence

Confidence among chief executives fell this quarter to the lowest point in four years, according to a survey released Sept. 17 by the Business Roundtable in Washington. The Duke University/CFO Magazine Business Outlook index also showed a similar decline this month among chief financial officers.

Demand for U.S. exports and lean stockpiles outside of the auto industry suggest manufacturing is unlikely to collapse, economists said.

U.S. steel inventories fell in August to the lowest since 2005, the Metal Service Center Institute, a trade association for metals industries, said Sept. 20.

Fort Wayne, Indiana-based Steel Dynamics Inc., the fifth- largest U.S.-based steelmaker, said last week that it will invest $85 million in an iron-making venture in Minnesota with Kobe Steel Ltd. to boost output of raw materials used in steelmaking.

Fed slashes interest rates to buffer economy

Sep 18, 2007 - The Federal Reserve on Tuesday slashed U.S. interest rates by a hefty half-percentage point in a bold bid to shield the economy from a housing slump and financial turbulence, sparking a big rally on Wall Street.

The unanimous decision by the central bank's policy-makers took the benchmark federal funds rate, which governs overnight loans between banks, down to 4.75 percent, its lowest since May of last year. The Fed also cut the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.

It was the first cut in the federal funds rate -- the Fed's main tool to influence the economy -- since June 2003 and the first half-point cut since November 2002.

Financial markets had widely expected the Fed to lower overnight borrowing costs, but were surprised by the aggressive half-point move, the first rate cut since Ben Bernanke took over as chairman of the central bank in February last year.

Stock prices surged as the decision gave investors hope the housing and credit turmoil wouldn't drag the economy down. The blue-chip Dow Jones industrial average closed up 335.97 points, or 2.51 percent, at 13,739.39. It was the Dow's best daily percentage gain since 2003.

However, prices for long-term government debt fell, suggesting some investors worried the Fed would fail to keep inflation tamped down, although prices for short-term notes rose in anticipation of further rate reductions.

"The Bernanke Fed has finally cast its unwarranted caution aside; we applaud this bold move," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in Valhalla, New York.

LIMITS TO RATE CUTS SEEN

But others worried the Fed may be prematurely abandoning its vigilance against inflation to soothe markets.

"This should make people less confident for the Fed to achieve their No. 1 objective, which is keeping inflation at bay," said Robert MacIntosh, chief economist at Eaton Vance Management, in Boston. "They overreacted."

Commercial banks swiftly followed the Fed and cut the prime rate they charge their best customers for loans.

Often when the Fed begins to lower credit costs, a heavy cycle of rate-cutting is in store. But economists on Wall Street appear to think the course kicked off by the Fed on Tuesday would prove limited.

A Reuters poll of 18 top bond firms that trade directly with the Fed in the markets showed a median forecast for a 4.5 percent federal funds rate by the time the central bank's easing cycle ends -- just a quarter-point below where the Fed left rates on Tuesday.

PRE-EMPTIVE STRIKE

In a statement outlining its decision, the Fed said its move was a pre-emptive strike to neutralize the impact of market turmoil on the economy.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," it said.

The central bank said it still believed the economy faced some risk of inflation, but said market developments since its last meeting in early August had increased the uncertainty surrounding the outlook.

"The committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," it said.

There has been accumulating evidence that a prolonged U.S. housing market downturn and a wild financial market ride over the summer have taken a toll on broader economic activity.

A decline in employment in August, the first drop in four years, appeared to confirm that housing-related strains were weighing on businesses and households.

In addition, reports on retail sales and industrial output in August also showed some softness.

At its previous regular meeting on August 7, the U.S. central bank had said its predominant concern was inflation, even as it noted tighter credit and financial market volatility.

Within days, financial markets unraveled as French bank BNP Paribas froze three funds with U.S. subprime mortgage market exposure. The Fed on August 10 said it would pump cash into the banking system as needed to keep markets functioning normally.

Even so, stock markets tumbled the following week, at one point plumbing declines of more than 10 percent below 52-week highs before rebounding.

The Fed then stepped in on August 17 with a surprise cut to the discount rate and an explicit acknowledgment that risks to economic growth had "increased appreciably."

Tuesday's rate cut seeks to address those risks.

"I think it was the right move," said Martin Feldstein, head of the National Bureau of Economic Research, who had called for rate cuts. "It can't solve the problems that are weakening the economy (but) it can help offset them."

Current-Account Deficit in U.S. Narrowed to $190.8 Billion

Sep 14, 2007 - The U.S. current-account deficit narrowed to $190.8 billion in the second quarter, as Americans earned more interest on overseas investments and government payments abroad slowed.

The shortfall followed a revised $197.1 billion in the first quarter that was larger than initially reported, the Commerce Department said today in Washington. The median forecast in a Bloomberg News survey of economists was $190 billion for the second quarter.

Even at current levels, Federal Reserve Chairman Ben S. Bernanke this week said the gap couldn't last 'indefinitely' and called on Americans to save more to reduce the shortfall. A persistently high shortfall risks a jump in interest rates and a slump in the dollar should foreign investors decided to unload U.S. assets. The U.S. must attract about $2.1 billion a day to fund the gap.

"It'll take us some time to make headway in improving the deficit further," Russell Price, senior economist at H&R Block Financial Advisors in Detroit, said before the report. Still, 'stronger growth in the rest of the world and a weak dollar weigh in favor of the trade deficit moderating over time.'

The median estimate reflected 51 forecasts in a Bloomberg News survey. Estimates ranged from deficits of $180 billion to $202 billion. The current-account gap in the first quarter was initially reported at $192.6 billion.

The current account is the broadest measure of trade because it includes transfer payments and investment income. The gap amounted to 5.5 percent of the economy compared with 5.8 percent in the prior quarter.

For all of 2006, the current-account gap grew to $811.5 billion, the biggest ever.

Trade Gap

The deficit in trade, which accounts for about 90 percent of the total, was little changed at $177.7 billion in the second quarter, compared with $177.6 billion in the first three months this year. Overseas demand is fueling sales at companies such as General Electric Co. and Deere & Co.

U.S. investors received more income on their holdings of overseas investments than foreigners received here. Income on overseas assets rose to $190.3 billion from $175.5 billion.

Foreign earnings on U.S. assets, including wages and other compensation, increased to $179.2 billion from $166.4 billion in the previous three months. That left a $9.4 billion surplus on income payments compared with a $7.5 billion surplus the prior quarter.

The U.S. government paid out $22.5 billion more to foreign governments and private entities than Americans received from abroad, compared with $27 billion in the previous quarter.

Foreign Investors

Investors abroad hold half of Treasuries outstanding, financed by savings built up in part from trade surpluses. U.S. liabilities to foreigners 'are not, at this point, putting an exceptionally large burden on the American economy,' Bernanke said in a Sept. 11 speech in Berlin.

Even so, there is a need to increase domestic saving rather than rely on the 'global saving glut' that is helping to fund the U.S. current account shortfall and keeping interest rates low, he said.

U.S. current-account deficits can't last 'indefinitely' at the current level, and there's a risk 'foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult,' the Fed chief said.

Bernanke's predecessor, Alan Greenspan, had in 2004 told the European Banking Congress in Frankfurt that a diminished appetite for adding to dollar balances 'must occur at some point.'

China's Reserves

China has a record $1.3 trillion of foreign-exchange reserves and household savings that amount to almost one-fifth of its economy. Some U.S. policy makers and manufacturers say that country has kept its currency, the yuan, artificially low to stimulate overseas demand for its products. Treasury Secretary Henry Paulson has urged China to let the yuan rise more.

A Commerce report on Sept. 11 showed the trade gap with China, the second-largest U.S. trading partner after Canada, widened in July to a level that was second only to the record $24.4 billion reached in October 2006.

The overall U.S. trade deficit narrowed in July to $59.2 billion after an upwardly revised $59.4 billion in June, as exports grew by the most in three years. The imbalance will become less of a risk in coming years, economists said.

"After 5 consecutive years of a widening current account deficit, we expect a stable-to-narrowing gap in 2007-2009," said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York.

The dollar is down 7.9 percent since the beginning of 2006 against a basket of currencies from major trading partners, making American goods cheaper for foreign buyers.

That's helped manufacturers such as Moline, Illinois-based Deere, the world's largest farm-equipment maker. The company increased its full-year profit forecast in August as third-quarter sales of machinery outside the U.S. jumped 30 percent.

U.S. Economy: Trade Deficit Shrinks to $59.2 bn as Exports Climb

Sep 11, 2007 - The U.S. trade deficit unexpectedly narrowed in July as Boeing Co., General Electric Co. and Deere & Co. shipped more airplanes, engines and tractors overseas.

Surging exports may help cushion the U.S. economy from the impact of higher borrowing costs, weakening employment and waning consumer confidence. Exports reached records in each of the past five months, buoyed by the strongest global expansion since the 1970s and a weaker dollar.

The gap shrank 0.3 percent to $59.2 billion from a revised $59.4 billion in June that was bigger than previously estimated, the Commerce Department said today in Washington. Economists anticipated a shortfall of $59 billion.

"Foreign demand is strong," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "It's a reminder that we do have a bit of a shock absorber."

Sales overseas climbed 2.7 percent, the most in three years, while imports rose 1.8 percent to $196.9 billion, also a record. The increase in imports reflected greater purchases of crude oil, drilling equipment and appliances. Overall demand for foreign- made capital goods slackened, led by a drop in computers.

The trade forecast was based on the median estimate of 70 economists surveyed by Bloomberg News. Projections ranged from deficits of $57.5 billion to $61.5 billion. The June deficit was initially reported at $58.1 billion.

The dollar remained lower against the euro after the report, trading at $1.3837 at 4:21 p.m. in New York, from $1.3802 late yesterday.

Exports Climb

The inflation-adjusted deficit, used to calculate growth, shrank to the smallest in three years.

Exports may help the economy expand as much as 3 percent in the third quarter, said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. His current estimate is 2.8 percent. Growth reached 4 percent from April through June.

American exports are benefiting from a decline in the dollar, which makes U.S. goods cheaper for foreign buyers. The dollar is down 7.9 percent since the beginning of 2006 against a basket of currencies from major trading partners, according to the Federal Reserve's Trade Weighted Broad Dollar Index.

Faster growth overseas is also protecting U.S. companies from slower demand at home. In the second quarter, China expanded 11.9 percent from a year earlier, the most in more than 12 years, and India grew at a 9.3 percent rate. Argentina's economy, the second-biggest in South America, will expand more than 8 percent this year, the government said on Sept. 5.

Growth Rates

The growth rates compare with a 1.9 percent pace of expansion in the U.S. and a 2.5 percent gain in the 13 countries using the euro.

"There are good signs for the trade deficit to gradually get smaller," said Brian Mandt, an economist at Deutsche Postbank AG in Frankfurt, who accurately forecast the gap. "The U.S. economy is definitely also benefiting from good growth outside the country."

Chicago-based Boeing is among the companies seeing overseas demand growing. The world's second-biggest airplane maker after Airbus SAS won a $1.9 billion order in August from Xiamen Airlines of China for 25 craft. Boeing delivered 25 planes to foreign buyers in July, up from 21 in June. Last month, overseas deliveries rose to 30.

GE, Deere

GE projects that as much as 60 percent of sales may come from outside the U.S. within five years, from 50 percent now, as it sells electronics and engines to emerging markets such as India and China.

Deere, the world's largest farm-equipment maker, increased its full-year profit forecast last month after third-quarter earnings rose 23 percent on orders for tractors overseas. Deere's sales of machinery outside the U.S. jumped 30 percent.

The trade gap with China, the second-largest U.S. trading partner after Canada, increased 13 percent to $23.8 billion in July, second only to the record $24.4 billion reached in October 2006.

Trade with China has become a politically sensitive issue as some policy makers and manufacturers say that country has kept its currency, the yuan, artificially low to stimulate demand. Treasury Secretary Henry Paulson has urged China to let its currency rise more.

China reported today that its trade surplus in August widened 33 percent to $24.97 billion from a year earlier, the second-highest monthly total. The surplus with the U.S., $15 billion, accounted for more than half the total. The figures reported by China and the U.S. don't match because of differences in methodology.

Oil Prices

Oil imports will remain a concern as prices continue to climb. The cost of imported petroleum surged 7 percent in July after a 4.4 percent gain the prior month, Labor Department figures show. Prices have increased even more since.

After eliminating the influence of prices, which are the trade numbers used to calculate gross domestic product, the deficit narrowed in July to $53.5 billion, the lowest since September 2004.

Economists at Lehman Brothers Holdings Inc. forecast trade will contribute 0.4 percentage point to GDP this year and 0.3 percentage point in 2008, after subtracting 0.1 last year.

"Still-strong global growth seems likely to provide a powerful offset both to overall growth and to corporate profits," Richard Berner, chief U.S. economist at Morgan Stanley, said in a note to clients yesterday. "Strong demand abroad will buoy U.S. growth."

Some European officials are also upbeat.

"The global economy has solid fundamentals," European Central Bank President Jean-Claude Trichet said at a press conference in Basel, Switzerland, yesterday. While uncertainties 'have augmented' after turmoil in financial markets, the overall sentiment that the world economy remains sound 'hasn't altered.'

U.S. core inflation gauge up 0.1 pct in July

Aug 31, 2007 - Core U.S. consumer prices rose by a less-than-expected 0.1 percent in July, showing stable prices that held the year-on-year rate of nonfood, nonenergy inflation to 1.9 percent for the second month in a row, the Commerce Department said on Friday.

"It doesn't seem like pricing pressures are moving out of control," said George Davis, chief technical strategist at RBC Capital Markets in Toronto.

But personal income and spending rose smartly, sending investors mixed signals about the chances for a Federal Reserve interest rate cut ahead of keenly awaited speech by Fed Chairman Ben Bernanke on Friday.

Analysts polled by Reuters were expecting the core price index to gain 0.2 percent on the month. The June month-on-month core price index gain was revised upward to a 0.2 percent gain from 0.1 percent reported previously.

In the same report, the government said in seasonally adjusted data, personal income rose by a bigger-than-expected 0.5 percent in July, marking the largest month-on-month gain since a 0.8 percent gain in March.

Personal spending rose 0.4 percent in July after an upwardly adjusted 0.2 percent increase for June. Analysts polled by Reuters were expecting both personal income and personal spending to rise 0.3 percent.

Overall prices, as measured by the government's personal consumption expenditures index, also rose 0.1 percent in July after an upwardly revised 0.2 percent gain in June.

July's 1.9 percent rise in the core PCE index, the Federal Reserve's favorite inflation gauge, was the lowest reading since a 1.9 percent rise in March 2004 and was within the Fed's normal comfort range of between one and two percent.

But market reaction to the report was muted ahead of a speech scheduled for 10 a.m. EDT (1400 GMT) by Bernanke in Jackson Hole, Wyoming on housing and monetary policy.

In federal funds futures markets, investors have priced in a 25-basis-point cut in the Fed's overnight lending rate for September. But after the data was released, the implied chance of a 50-basis point cut fell to 42 percent against 64 percent late on Thursday.

In the Commerce Department report the personal savings rate rose to 0.7 percent of disposable personal income from 0.5 percent in June.

Factory Orders Jump 3.7% In July

Aug 31, 2007 - Factory orders showed a notable increase in the month of July, according to a report released by the Department of Commerce on Friday, with a sharp rise in orders for durable goods contributing to the increase.

The report showed that factory orders increased by 3.7 percent in July following a 1.0 percent increase in June. The increase in the previous month was upwardly revised from the 0.6 percent growth originally reported.

The strong growth in factory orders was partly due to a sharp rise in durable goods orders, which rose 6.0 percent in July after rising 1.8 percent in the previous month. The increase was revised up from the 5.9 percent increase reported last week.

Strength in the transportation sector contributed to the jump in durable goods orders, with orders for transportation equipment rising by 11.0 percent in July.

The report also showed that orders for non-durable goods increased by 1.3 percent in July following a 0.2 percent increase in June.

The Commerce Department also said that shipments of manufactured goods rose 2.6 percent in July, while inventories of manufactured goods edged up 0.2 percent. Subsequently, the inventories-to-shipments ratio fell to 1.21 from 1.24 in the previous month.

Strong investment pushes U.S. Q2 growth up

Aug 30, 2007 - Robust business investment helped push U.S. second-quarter growth ahead at an upwardly revised 4 percent annual rate, the government reported on Thursday, the fastest pace since early last year but one that is unlikely to be sustained.

The Commerce Department revised its estimate of gross domestic product -- the measure of total goods and services output within U.S. borders -- up from a 3.4 percent rate that it published a month ago. That was in line with Wall Street economists' forecasts and far outstripped the first quarter's anemic 0.6 percent rate of expansion.

Since then, a credit squeeze that stems from rising default rates for subprime mortgages and that has disrupted financial markets worldwide has caused policy-makers and analysts to scale back estimates for U.S. growth in coming quarters.

There was scant evidence of any inflation problem in the second quarter. So-called core prices that exclude food and energy items rose at a low 1.3 percent rate instead of 1.4 percent as previously thought, down from 2.4 percent in the first quarter and the lowest since a matching 1.3 percent in the second quarter of 2003.

U.S. Treasury prices held steady at higher levels after the GDP data was released, while stock futures cut their losses but remained in the red.

Key sources of the upward revision in second-quarter growth were healthier business investment and a better trade performance than the department estimated a month ago.

Second-quarter growth was the most vigorous since a 4.8 percent rate in the first quarter of 2006.

BOOST FROM BUSINESS SPENDING

Businesses boosted their spending on expanded plant and equipment at an 11.1 percent annual rate instead of 8.1 percent, the strongest since the beginning of last year and far ahead of the first quarter's 2.1 percent rate.

Exports grew at a 7.6 percent rate instead of 6.4 percent previously estimated and compared with a slim 1.1 percent in the first quarter. Imports shrank at a 3.2 percent rate rather than 2.6 percent after growing at a 3.9 percent rate in the first quarter.

Consumer spending that is a mainstay of U.S. economic growth and that is considered threatened by the subprime mortgage crisis, increased at a 1.4 percent rate instead of 1.3 percent as estimated a month ago but that was well below the first quarter's 3.7 percent and was the weakest rate since the final three months of 2005.

The steady decline in the housing sector was evident in the revised GDP figures, which showed spending on housing contracting at an 11.6 percent rate instead of 9.3 percent -- a sixth straight quarter of falling spending.
Treasury Secretary Henry Paulson said last week that turmoil in financial markets stemming from rising defaults in subprime mortgage markets was likely to last for a while.

Paulson said the global growth outlook was strong and said that will buffer the United States from the worst impact of credit problems, even though U.S. economic performance will be affected. "Economic growth will be less than it ordinarily would have," Paulson conceded.
Leman Brothers said this week it was cutting its estimate for GDP growth to a 1.8 percent rate for the next several quarters, citing a faltering housing sector and rising risk that consumers will spend less on cars and other costly goods.

In a letter written on Monday and made public on Wednesday by New York Democratic Sen. Charles Schumer, Federal Reserve Chairman Ben Bernanke repeated the U.S. central bank was "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruption in financial markets."

House prices suffer worst fall in index history

Aug 28, 2007 - An index measuring U.S. house prices suffered its worst decline since its creation 20 years ago, and there is no sign of a bottom for the market, according to a report compiled by Standard and Poor's and economist Robert Shiller.

The S&P/Case-Shiller U.S. National Home Price Index fell 3.2 percent to 183.89 last quarter from the same period in 2006, its sharpest decline in the index's history dating back to 1987, S&P said in a statement. The pace of decline accelerated from 1.6 percent in the first quarter.

"The pullback in the U.S. residential real estate market is showing no signs of slowing down," Shiller, the creator of the index and chief economist at MacroMarkets LLC in Madison, New Jersey, said in the statement.

The report adds to recent indications that the housing slump that began in late 2005 may worsen.

On Monday, the National Association of Realtors said inventories of homes rose 5.1 percent in July, boosting the overhang of supply that tends to put downward pressure on prices. Reports this week on subprime mortgage securities show delinquencies on loans backing the bonds continued to rise in August.

Falling house prices are fueling concern that the economy may head toward recession as homeowners with little equity in their properties are unable to refinance adjustable-rate loans at better terms before monthly payments rise.

At the same time, lending in the past two months has been restricted to even "prime" borrowers, suggesting housing data will soften in the months ahead, economists said. Two-thirds of the nation's home builders said tighter underwriting standards have hurt business in the past month, up from a third in March, according to a National Association of Home Builders poll.

U.S. existing home sales fell in July

Aug 27, 2007 - The pace of sales of pre-owned U.S homes fell slightly in July to a 5.75 million unit annual rate and the supply of unsold single-family homes hit its highest level since 1991, the National Association of Realtors said in a report on Monday.

Total existing home sales, which include condominiums, fell 0.2 percent in July from an upwardly revised 5.76 million seasonally adjusted annual rate in June, first reported as 5.75 million.

The association's economist Lawrence Yun said the market is holding on despite temporary mortgage disruptions from fallout in the subprime market and rising foreclosures.

"In the aggregate, we don't see the subprime market damaging the economy," Yun said.

But the inventory of homes for sale rose 5.1 percent to 4.59 million, representing 9.6 months worth of supply at the current sales pace. That total, which includes condominiums, is the highest on record since the association began tracking both single-family and condominium sales together in 1999.

The supply of single-family home sales, which accounts for the bulk of existing home sales, was at 9.2 months' worth in July, the highest level since 9.3 months in October of 1991.

"This shows that the housing downturn continues to intensify. It shows no signs of abating," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.

"Given the turmoil in the financial market from lending problems, the housing problem will continue in the months ahead," he added.

Last month's decline in existing home sales was smaller than expected. Economists polled ahead of the report forecast home resales to drop to a 5.70 million-unit pace.

Median home prices fell 0.6 percent from a year ago to $228,900.

U.S. July new home sales, durables orders rise

Aug 24, 2007 - Sales of new single-family U.S. homes unexpectedly rose in July and new orders for durable goods posted strong gains that underlined the economy's strength just before a credit crisis socked financial markets.

New home sales rose 2.8 percent to an 870,000 annual pace last month, reversing two months of declines, and inventories eased, a Commerce Department report showed on Friday.

Analysts were expecting new home sales to dip to an 820,000 sales pace. Home sales in June were revised to an annual rate of 846,000 from the previously reported 834,000 rate.

"It's unexpectedly firm. So combined with durable goods data, this suggests that the economy was fairly sturdy heading into the market disruption in August," said Pierre Ellis, senior global economist at Decision Economics in New York.

An earlier Commerce Department report showed new orders for long-lasting U.S.-made manufactured goods surged a much bigger-than-expected 5.9 percent in July, the biggest gain since September, and a business investment gauge posted the first gain in three months.

Analysts were expecting orders of durable goods, which are meant to last three years or more, to rise 1 percent. Non-defense capital goods orders excluding aircraft, viewed as an indicator of business spending, gained 2.2 percent, the steepest climb since March.

Evidence of underlying economic strength was applauded by steadier markets. Stocks rose, sending the broader market to its best weekly close in five months. Treasury debt prices were mixed, with yields on shorter-dated securities rising as traders unwound safe-haven bets.

The dollar fell as calmer credit markets renewed interest in riskier overseas assets.

The Federal Reserve did not conduct any open market operations on Friday, only the second day it refrained from pumping money into the financial system since a credit crunch began two weeks ago.

However, analysts cautioned that Friday's data reflect activity prior to August's financial market turmoil over subprime mortgage loan delinquencies.

"It doesn't reflect the impact of the recent financial crisis," Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York, said of the durables report.

Excluding volatile transportation orders, durables orders jumped 3.7 percent in July, the sharpest rise since August 2005 and the first gain in that category since April. With defense orders stripped out, durables orders advanced 4.9 percent, the strongest increase since March.

Analysts were expecting a 0.6 percent gain in durables orders ex-transportation and a 0.5 percent advance in durables orders ex-defense.

Transportation equipment orders rose 10.8 percent. Civilian and defense aircraft orders advanced by 12.6 percent and 15.8 percent respectively, while orders for cars, trucks and parts advanced 9.8 percent.

Orders for computers and electronic products and machinery posted their sharpest gains since November 2006.

The Commerce Department said the supply of homes available for sale eased to a seasonally adjusted 533,000, the lowest since January 2006. That represents a 7.5 months' supply of homes available at the current sales pace.

The supply of new homes available for sale is down 7 percent from July 2006, the biggest 12-month drop since January 1998.

The median sales price rose to $239,500 in July from $230,600 in June. That was down 3.4 percent from the same month a year earlier, the biggest 12-month decline since October 2001.

Fiscal 2008 budget deficit seen at $155 billion

Aug 23, 2007 - The U.S. budget deficit for this fiscal year will shrink to $158 billion, the Congressional Budget Office said on Thursday, much lower than a March estimate of $177 billion due mainly to strong economic growth.

In its August review of the budget, the nonpartisan agency forecast the deficit for fiscal 2008, which begins October 1, to be at $155 billion. In March the CBO estimated a fiscal 2008 budget deficit of $113 billion.

The agency cited economic uncertainty due to housing market problems, but said the most likely outlook was for a "sound" U.S. economy. The agency said the long-term budget outlook was "daunting," however, due largely to rising health care costs.

Inflation as measured by the consumer price index for urban consumers is projected to decline to 2.3 percent next year from 2.8 percent this year, the report said.

"Prices for food and energy, which increased during the first half of this year, are expected to moderate, keeping overall inflation lower than in the recent past," it said.

U.S. July home starts, permits fall to 10-yr lows

Aug 16, 2007 - U.S. groundbreaking for new homes fell 6.1 percent in July to the lowest pace in more than 10 years while building permit activity, a sign of future construction plans, sank to a nearly 11-year low, a government report on Thursday showed.

Dealing more bad news to the housing sector and financial markets, the Commerce Department said housing starts set an annual pace of 1.381 million units in July, lower than Wall Street forecasts for 1.405 million units as well as the upwardly revised 1.470 million rate for June. It was the lowest pace since the January 1997 rate of 1.355 million units.

Building permits fell 2.8 percent in July to an annual pace of 1.373 million, their lowest since October 1996 when they reached 1.358 million. Economists polled by Reuters had forecast July permits at 1.400 million after 1.413 million in June.

Compared with a year earlier, July home starts were off 20.9 percent, while permits were down 22.6 percent.

As lenders have tightened credit standards in response to major financial market turmoil in recent weeks, increasing numbers of potential buyers have been denied affordable mortgages, sending the home market into a downward spiral. Analysts said the data will add to market gloom.

"The housing starts number just adds fuel to the fire. You've got financial markets in panic. It looks like fears are overriding the fundamentals and that may continue for a while," said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.

The data sent U.S. Treasury debt prices higher, while the dollar fell and stock index futures remained sharply lower.

U.S. home builder confidence ebbed to its lowest level in 16 years in a survey released on Wednesday. The National Association of Home Builders/Wells Fargo Housing Market Index dropped 2 points to 22 in August, while the level of prospective buyers dropped to its lowest level since 1990.

The drop in housing starts was the worst in the South, where they fell 11 percent in July. Starts fell 3.7 percent in the West and 1.3 percent in the Northeast, but they rose 2.6 percent in the Midwest.

U.S. inflation tame, credit fears spook markets

Aug 15, 2007 - Falling gasoline costs held U.S. consumer prices nearly in check in July and industrial output rose, according to data on Wednesday that suggested the economy was on a sound footing despite financial markets' credit fears.

Other reports showed a slight dip in New York state manufacturing activity this month and a decline in the amount of capital flowing into the United States in June.

Analysts said the latest data, combined with reports earlier this week showing solid retail sales and a shrinking trade deficit, point to an economy that is performing relatively well.

"Things don't look that bad. There is no evidence yet in the data that the economy is on the cusp of losing steam," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

Still, a gauge of home builder sentiment from the National Association of Home Builders hit its lowest ebb since January 1991, suggesting a housing slump still had a ways to run.

"Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market and prompting others to delay their decision to purchase a new home," said NAHB President Brian Catalde, a home builder from El Segundo, California.

The bulk of the data came in close to Wall Street expectations and financial markets focused less on indications of the economy's recent health and more on ongoing worries that credit would evaporate as U.S. subprime mortgage problems widen.

Over the past week, central banks around the globe have pumped money into the financial system in an effort to keep credit flowing, but they have had only limited success calming nervous markets.

Financial markets now expect the U.S. Federal Reserve to lower interest rates at its next meeting on Sept. 18, if not before, to buffer the economy as credit becomes more scare.

Many economists, however, do not expect the central bank to act that quickly.

"To me, the risk remains the economy not inflation, but I doubt the Fed will change course before the Sept. 18th meeting without an even more major deterioration in financial conditions," said Joel Naroff, president and chief economist of Naroff Economic Advisors in Holland, Pennsylvania.

CONSUMER PRICES UP LESS THAN EXPECTED

The Consumer Price Index, a key inflation gauge, rose just 0.1 percent last month as gasoline prices fell 1.7 percent, the Labor Department said. Economists polled by Reuters had expected a rise of 0.2 percent.

So-called core inflation, which excludes volatile food and energy prices, rose 0.2 percent, matching forecasts. Year-over-year, the core CPI held steady at 2.2 percent for a third straight month.

The Fed said last week that inflation remained its predominant concern, although it acknowledged that a wobbly housing market had led to tightening credit terms for some households and businesses.

"The July CPI readings don't make it any harder or easier for the Fed to cut interest rates," said Richard Huber, economist at A.G. Edwards and Sons in St. Louis. "The trade deficit data we got yesterday will drive GDP numbers for the second quarter higher, which will allow the Fed to say that it's still focused on inflation."

INDUSTRIAL OUTPUT UP

Industrial output rose 0.3 percent in July as automotive-related production surged 2.6 percent, offsetting a big decline in utility output, a Federal Reserve report showed.

Manufacturing output rose 0.6 percent.

"Low inventory levels, strong export demand, and ongoing moderate economic growth at home have allowed the manufacturing sector to shake off the depressing effects of the housing downturn," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

Separately, the U.S. Treasury said net overall capital inflows into the United States dropped to $58.8 billion in June from May's revised inflow of $107.3 billion, hurt by a plunge in net purchases of U.S. securities by private investors (details here).

June's net overall capital inflow barely covered the U.S. trade deficit for the month of $58.1 billion.

In another report, the New York Federal Reserve Bank said manufacturing in New York State factories slowed in August. The New York Fed's "Empire State" general business conditions index fell modestly to 25.06 from 26.46 in July.