Soft sales and plunging prices for new homes together with a surge in claims for new jobless benefits highlighted a slide in U.S. economic activity that forced the Bush administration on Thursday to scale back its estimate for growth in 2008.
A day after Federal Reserve Vice Chairman Donald Kohn said economic uncertainties were unusually high and no end was in sight to the housing slump, the Commerce Department said median home sales prices in October tumbled at the steepest rate since 1970 on a year-over-year basis to $217,800, a 13 percent drop.
That took the glow off a separate report from the Commerce Department that gross domestic product - the broadest measure of national economic activity - climbed at a revised 4.9 percent rate in the third quarter, its best performance in four years.
Previously, the department said third-quarter growth was at a 3.9 percent rate, but even the revised figure was largely dismissed as old data by financial market participants more preoccupied with risks a downturn could become a recession.
NEW, DARKER WORLD
It is a completely different world now and we expect GDP to actually contract over the final three months of this year, said Paul Ashworth, an economist with Capital Economics Inc in London. The chances of an outright recession -- two quarters of negative growth -- are probably as high as 50-50.
Stock prices were in little changed in early afternoon but bond prices leapt higher as investors sought safer haven in government-guaranteed debt securities.
The White House acknowledged that economic prospects were suffering, recasting its estimates for 2008 GDP growth downward to 2.7 percent from 3.1 percent that it forecast in June.
In an interview from Los Angeles, Commerce Secretary Carlos Gutierrez said 2.7 percent growth should still be regarded as healthy and added: We believe other sectors of the economy can offset the housing correction.
The Commerce Department said new-home sales in October were at an annual rate of 728,000 units -- well below Wall Street economists' forecasts for a 750,000-unit rate. The department revised down September new-home sales steeply to a 716,000-unit rate from a previously reported 770,000, further underlining the housing sector's decline.
Separately, the Labor Department said new claims for unemployment aid jumped by 23,000 last week to the highest since February, though the figure might have been affected by the fact that last Thursday was the U.S. Thanksgiving Day holiday.
DAMPER ON CONSUMER SPIRITS
Another report from the Office of Federal Housing Enterprise Oversight (OFHEO) said U.S. housing prices posted their first quarterly drop in 13 years during the third quarter. That is likely to act as a damper on consumer spirits after years in which many homeowners felt free to tap the accumulated equity in their homes to finance spending.
While select markets still maintain robust rates of appreciation, our newest data show price weakening in a very significant portion of the country, OFHEO Director James Lockhart said.
Falling home prices, weakening consumer confidence and the pickup in jobless claims reinforced the view of many private-sector analysts that the economy was at risk of a more serious downturn than policy-makers wish to acknowledge.
It looks like it could be lights out for the economy, said economist Chris Rupkey of Bank of Tokyo-Mitsubishi UFJ in New York, referring to the rise in claims. This is exactly what it looks like when we are going into recession.
Economist Steven Wieting of Citigroup said that after showing surprising resilience through 2-1/2 years of housing declines, the economy now faced pressure from tightening credit conditions. As a result, We...think growth in the fourth quarter will be below 1 percent, he added.
The Federal Reserve said on Wednesday, in its latest Beige Book survey of national economic conditions, that growth had slowed in October and the first half of November, largely because of an ongoing slowdown in the housing sector.
Kohn said on Wednesday that policy-makers had to stay nimble and to be prepared for flexible and pragmatic policy-making, words that markets took to mean the Fed was likely to lower interest rates further as a stimulant.
On another down note, the International Monetary Fund said it will revise down its October estimate of 4.8 percent for world growth in 2008, given the impact of costlier oil and continued financial market turbulence.
Some of the downside risks that we had identified (in October) have materialized, IMF spokesman Masood Ahmed said.