While the market iss spooked today by Merrill’s $16.7 billion writedown announdement (Dow down 189 as of this writing), which had been anticipated to a considerable degree in the media, grim news on other fronts certainly doesn’t help either.
An aside: the story on Merrill says that the Wall Street writedowns related to subprime were over $100 billion even before the announcement today. Note that does not include losses at foreign banks or in investor portfolios.
Bloomberg summarizes the latest economic releases: new housing starts down 14% after a teeny rise in November plus a sharp fall in the manufacturing index. If this doesn’t indicate a recession, it’s hard to know what does.
The U.S. housing slump deepened in December, concluding the worst year for the industry since Jimmy Carter was president, while a gauge of manufacturing tumbled to a level unseen since the 2001 recession.
Home construction fell 14 percent to an annual rate of 1.006 million, the Commerce Department said today in Washington. The drop exceeded the most pessimistic projection among economists surveyed by Bloomberg News. For all of 2007, starts were down 25 percent, the most since 1980. Meanwhile, the Philadelphia Federal Reserve Bank’s general economic index fell to minus 20.9, the lowest reading since October 2001.
Federal Reserve Chairman Ben S. Bernanke told Congress today that the economy is “suffering” and said a stimulus package would help shore up growth. He repeated that he’s ready to respond to the faltering expansion after cutting the main interest rate by 1 percentage point since September.
“The likelihood of a recession has increased,” said Gary Bigg, an economist at Bank of America Corp. in New York. “We’re looking for fairly weak growth over the first half of 2008.”
The Philadelphia Fed report showed new orders and shipments dropped, indicating that the slump in housing is spreading through the economy. The index of new orders fell to minus 15.2 from 12. Shipments dropped to minus 2.3 from 15.
The Dow Jones Industrial Average slipped 0.8 percent to 12,338 at 11:25 a.m. in New York. The yield on the benchmark 10- year Treasury note decreased to 3.67 percent, from 3.73 percent last yesterday. The dollar weakened against the euro and yen.
A separate report by the Labor Department showed initial claims for unemployment insurance retreated to a three-month low. Jobless claims declined by 21,000 to 301,000 in the week ended Jan. 12. The department said the figures during this time of year are especially hard to adjust for seasonal variations.
Housing starts were projected to fall to a 1.145 million pace from a previously reported 1.187 million rate in November, according to the median forecast of 74 economists polled by Bloomberg News. Estimates ranged from 1.05 million to 1.2 million.
Rising foreclosures will throw even more houses onto the market, hurting property values and threatening to push the economy into recession, economists said.
“The negative influence of housing on overall economic performance could affect the outlook for some time,” Sandra Pianalto, president of the Fed’s Cleveland branch, said in a speech today to the Association for Corporate Growth in Cleveland. “We are also seeing a related slowing in consumer spending, perhaps in response to reduced household wealth.”
Permits fell 8.1 percent to a 1.068 million annual rate, bringing 2007’s decline to 25 percent, the biggest since 1974. Permits were forecast to drop to a 1.135 million annual pace, according to the survey median, after 1.162 million. Projections ranged from 1.05 million to 1.17 million.
“Housing will take a big bite out of growth in the fourth quarter and first quarter,” said Avery Shenfeld, a senior economist at CIBC World Markets in Toronto, who had the lowest forecast for housing starts. “There’s a huge oversupply of homes, and we can’t expect the pace of building to pick up until we make progress on that.”
Construction of single-family homes decreased 2.9 percent to a 794,000 rate, today’s report showed. Work on multifamily homes, such as townhouses and apartment buildings, plunged 40 percent to an annual rate of 212,000 from the prior month.
The decrease in starts was led by a 31 percent slump in the Midwest and a 26 percent decline in the Northeast.
Fed policy makers have signaled they may take more aggressive action in response to the increasing risk of slower growth. Central bankers are likely to cut rates by half a percentage point when they meet later this month, according to futures trading.
“Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone,” Bernanke said in testimony today to the House Budget Committee. He repeated remarks from last week that the Fed is ready to take “substantive additional action” to insure against risks of a recession.
New home sales will probably fall another 15 percent this year after tumbling an estimated 26 percent in 2007, according to a forecast from the Mortgage Bankers Association, the industry’s largest trade group. Sales of existing homes will fall 13 percent this year, the group said.
“Conditions continue to be challenging in our markets and are expected to remain so throughout 2008,” Robert Schottenstein, chief executive officer of M/I Homes Inc., a homebuilder in the Midwest, Florida and Mid-Atlantic states, said in a statement on Jan. 10. The Columbus, Ohio-based company said that sales fell in the fourth quarter.