U.S. home prices fall, but prices of everything else rise

IHT
Posted: 2008-02-26 17:34:44

Two worrisome trends for the U.S. economy - falling home prices and the rising cost of everything else - picked up speed in data reported Tuesday, putting policy makers in an increasingly tough position.

If they move too aggressively to cut interest rates and stimulate the economy, they might stoke inflation at a time when consumers are already being squeezed by higher prices for food, energy, clothing and other goods. But if they choose more austere measures, the U.S. economy may weaken substantially faster.

"The Fed is now having to walk a very fine line," said Jane Caron, chief economic strategist at Dwight Asset Management, an investment firm that specializes in bonds. "We have clearly seen an accelerating in inflation pressure in the last couple of months, and the risk is that the markets are going to react negatively to aggressive easing going forward."

A leading index of home prices in 20 U.S. cities fell 9.1 percent in December from a year earlier. Using a three-month moving average, the index, the Standard & Poor's/Case-Shiller, is falling at an annual pace of more than 20 percent. The index tracks repeat sales of single-family homes; it does not include condominiums. It fell 8.9 percent in the final quarter of 2007, the steepest drop in its 20-year history.

The U.S. Labor Department reported that wholesale prices, which exclude taxes and distribution costs, rose 1 percent in January, compared with a drop of 0.3 percent in December. Prices were up 7.4 percent from a year earlier, the fastest rise in 26 years. Excluding volatile food and energy prices, the index increased 2.3 percent from a year earlier, up from a 2 percent gain in December.

Not surprisingly, a measure of consumer confidence fell to its lowest level in nearly five years.

President George W. Bush on Tuesday said the U.S. economy was softening but not falling into a recession, Reuters reported from Washington.

"We're not in a recession, I don't think we will go in a recession," Bush said during an interview with American Urban Radio Networks. "We're in a slowdown, and there's a difference."

The latest inflation report appears to corroborate a broad trend of higher prices. Last week, the Labor Department reported elevated readings for consumer prices. The consumer price index was up 4.3 percent last month from a year earlier. But at about 2.5 percent in January, the core consumer inflation rate - which excludes food and energy - remained closer to the Fed's target of 1 percent to 2 percent.

"Months of surging energy prices appear now to be trickling up the production chain to finished goods prices," Kenneth Beauchemin, an economist at Global Insight, a research firm, wrote in a note to clients.

The drumbeat of negative economic data appears to be taking a toll on consumers - at least in the way they perceive the economy, if not in how they spend. The Conference Board reported that its consumer confidence index fell to a reading of 75 this month from 87.9 last month. The index was last at this level in early 2003, at the start of the war in Iraq.

The collapse in home prices has worsened the situation for mortgage holders, especially those with loans whose rates are rising sharply even as the Fed cuts interest rates. Repossessions rose 90 percent in January from a year earlier, to 45,327, according to RealtyTrac, which provides foreclosure statistics.

Optimism rising in Germany

Business sentiment in Germany unexpectedly rose for a second consecutive month according to a survey released Tuesday, although the results also revealed concern about the near future, The Associated Press reported from Berlin.

The Ifo institute in Munich said its business climate index increased to 104.1 in February from 103.4 in January, well above most analysts' predictions.

But the survey, which polled 7,000 companies, showed that a measure of expectations for the next six months fell to 98.2 points from 99.0 in January, a signal that there was still concern about the possibility of a global slowdown.

"The economic situation of German industry and trade is robust, but the expectations continue to point to a cyclical weakening," said Hans-Werner Sinn, president of the Ifo Institute. Despite the back-to-back increases, analysts said it was too early to say if the measured improvement was a trend.

Separately Tuesday, the government said that German economic growth fell by more than half in the final quarter of 2007, even as its exports kept supporting the economy. The Federal Statistical Office said that gross domestic product grew 0.3 percent in the October-December period compared with 0.7 percent growth in the previous quarter.