Consumer Slowdown to Hurt U.S. Economy Into 2008

U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, a survey showed.

Economists cut their estimates for the expansion this quarter from November's 1.5 percent forecast, according to the median of 63 estimates in a Bloomberg News survey taken Dec. 3 to Dec. 10. Gross domestic product in the first three months of next year will also be less than previously projected.

Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power. The Federal Reserve will probably lower interest rates today and again early next year to fend off recession, the survey said.

Everything is going against the consumer, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who lowered his growth forecast to 0.5 percent for this quarter. Confidence is off quite a bit, and gasoline is going to take a toll. We're very, very close to a recession.

The world's largest economy grew at a 4.9 percent pace from July through September.

The 1.7 percent average increase in consumer spending this quarter and next would be the weakest back-to-back rise in five years. The 2.1 percent gain projected for all of 2008 is the smallest since a 0.2 percent increase in 1991, during a recession.

No Growth

Consumers are slowing their spending quite considerably, and we have a much, much worse housing situation, said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, who slashed his fourth-quarter growth forecast to zero, from 1.3 percent in the November survey.

It wouldn't take much of a shock at this point to push us over the edge into a contraction, he said.

Consumers face headwinds from reduced access to credit, higher gasoline prices and falling home values, Fed chief Ben S. Bernanke said last month.

Policy makers will reduce the benchmark interest rate by a quarter point to 4.25 percent today and follow it with a similar reduction in one of the first two meetings of 2008, according to the survey median. Economists last month projected the Fed would not change policy today.

Some economists predicted the Fed would be more aggressive.

The risks of a recession are not insignificant, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, who forecast a half-point reduction at today's meeting. The Fed looked a bit flip-floppy earlier, and that's hurt them. They now need to step up to the plate.

`Feels Recessionary'

The growth forecast for next year's first quarter was cut by a half point to 1.5 percent and each of the next three quarters was reduced by a 10th of a point. For all of 2008, the economy will probably expand 2.3 percent compared with 2.2 percent this year.

It feels recessionary even if it doesn't fit into the traditional definition of a recession, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. We'll have painfully slow growth for most of next year.

Slower growth will also help cool inflation. Consumer prices will probably rise 3.8 percent this year, the most since 1990, reflecting the jump in fuel and food costs, the survey showed. Economists projected the cost of living will increase 2.3 percent next year.

The Fed's preferred inflation gauge, which is tied to consumer spending and excludes food and fuel, will rise 1.8 percent in 2008 after a 1.9 percent increase this year, the survey showed. The measure, known as core prices, would be within the range forecast by policy makers.

Not `Bleak'

Core inflation will move sideways to down and headline inflation also will slow as energy prices come off, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. Not all news is bleak.

Rising wages and more jobs may help consumers weather the jump in fuel costs and the housing slump, economists said. The unemployment rate, currently at 4.7 percent, will only rise to 5 percent by the second half of 2008, according to the Bloomberg survey median.

The economy added 94,000 jobs last month and workers' average hourly earnings were up 3.8 percent from November 2006, the Labor Department reported Dec. 7. About 80 percent of this month's forecasts were received after the figures were released.

The consumer is slowing, not declining, said LaVorgna, who cut his fourth-quarter growth estimate to 0.5 percent from the 1 percent he projected last month. I don't have a strong forecast for 2008, but I don't think we'll have a recession.

Source - Bloomberg

Wall Street bets on rate cuts

Stocks gain as investors weigh a better-than-forecast pending home sales index and await Tuesday's Federal Reserve rate-cut decision.

Stocks jumped Monday as investors welcomed a stronger-than-expected pending home sales report and geared up for Tuesday's expected interest-rate cut from the Federal Reserve.

The Dow Jones industrial average added 0.7 percent. The broader S&P 500 index added 0.8 percent and the tech-fueled Nasdaq composite added 0.5 percent.

Treasury prices slumped, boosting the corresponding yields. The dollar fell versus the euro and was little changed versus the yen. Oil prices dipped and gold prices rose.

The Fed's policy committee, meeting Tuesday, is widely expected to cut the fed funds rate, a key short-term lending rate, by a quarter-percentage point, to 4.25 percent, after cutting rates at the last two meetings.

Some Wall Streeters are looking for a cut of a half-percentage point, but such bets were diminished by last week's mostly upbeat November jobs report.

"I think people are pretty positive that we'll get a quarter-percentage point cut and also hoping that maybe we'll get a half-percentage point cut," said Curtis Teberg, portfolio manager of the Teberg Fund.

The central bank has been cutting the fed funds rate, which impacts consumer borrowing costs, since September, as a means of loosening up the credit market and trying to keep the economy out of falling into a recession.

Investors will also be looking to the statement Tuesday that accompanies the decision to shed further light on the Fed's outlook for the economy and the risks to that outlook.

Stocks are also continuing to coast on the positive momentum that has been in place for the last few weeks, said John Merrill, CEO at Tanglewood Capital Partners.

He said that the market has been driven over the last few weeks on a combination of technical factors and hopes that the Fed will cut rates again. As such, "we may see some selling after Tuesday, as investors take a buy on the rumor, sell on the news reaction," Merrill said.

Ahead of the meeting, Wall Street eyed the morning's pending home sales index, which showed a rise of 0.6 percent, versus forecasts that sales would fall 1 percent.

After the close of trade Monday, mortgage lender Washington Mutual said it was cutting its dividend and more than 3,000 jobs in the wake of the housing and credit market crisis.
The Fed's plan B

In corporate news, UBS issued a profit warning, said it will write down about $10 billion related to the credit market crisis and will borrow about $11.5 billion from outside investors.

Troubled bond insurer MBIA said Monday that it will receive a $1 billion investment from private equity firm Warburg Pincus. Shares jumped around 13 percent.

McDonald's, a Dow component, reported November sales at its stores open a year or more rose 8.2 percent, well above estimates. Shares gained nearly 3 percent.

MGI Pharma rallied nearly 20 percent after the drug company agreed to be bought by Japanese drug company Eisai for $3.9 billion in cash.

McDonald's was one of many Dow components rising, with 26 of the 30 blue-chip components higher. Other gainers included Alcoa, General Motors, Citigroup, Caterpillar, Honeywell and JP Morgan.

Market breadth was positive. On the New York Stock Exchange, winners topped losers 5 to 3 on volume of 1.17 billion shares. On the Nasdaq, advancers beat decliners eight to seven on volume of 1.81 billion shares.

Treasury prices slipped, boosting the yield on the 10-year note to 4.15 percent from 4.10 percent late Friday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and was little changed against the yen.

U.S. light crude oil for January delivery fell 42 cents to settle at $87.86 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rallied $13.30 to settle at $813.50 an ounce.

Source - CNN Money

Shakeup at News Corp.

Rupert Murdoch names two Britain-based lieutenants to oversee Dow Jones, while son James looks increasingly like News Corp.'s future chief.

Two of Rupert Murdoch's senior hands in the viciously competitive British newspaper business will assume the top posts at Dow Jones and Company.

According to people familiar with Murdoch's plans, Les Hinton, who oversees News International, Murdoch's British newspaper operation, will be named chief executive of Dow Jones in the wake of the resignation Thursday of Richard Zannino, who was CEO for two years.

Hinton, who has previously worked for Murdoch both in Australia and the United States, is possibly the media baron's longest-serving lieutenant.

He's been with Rupert every step of the way, said one News Corp. insider.

In addition to putting Hinton in charge of Dow Jones after Murdoch's $5-billion acquisition closes Dec. 14, Robert Thomson, the editor-in-chief of London's Times newspaper, is expected to replace Gordon Crovitz as publisher of the Wall Street Journal.

Zannino had an eventful two year run as Dow Jones' chief executive, and was the first person at the company the billionaire media baron told of his intention to bid for the company - over a breakfast in Murdoch's midtown office back in March. Zannino was put in the awkward position of not taking a public position on the unsolicited offer for weeks because the company was controlled by a family, the Bancrofts, who initially seemed to rebuff News Corp.
Dow Jones CEO out the door

Rupert and I have been discussing since September my moving on from the company after the closing, Zannino said. I will leave Dow Jones knowing the best is yet to come for readers, customers and employees under Rupert's leadership.

Under a change-in-control provision that was enhanced after Murdoch's bid, Zannino could be entitled to a payout worth as much as $25 million. Crovitz would be entitled to around $8 million.

I understand Rich's decision to seek new challenges, Murdoch said in a statement. During nearly two years as CEO, he proved himself to be an effective leader who revitalized Dow Jones during a time of great change in the industry.

Adding to the shakeup at News Corp., James Murdoch, Rupert's son, is expected to be elevated from his post as CEO of BSkyB in London to oversee all of News Corp.'s European and Asian businesses. Such a move would clearly put James in place among Murdoch's six children from three marriages to eventually take over running News Corp. from their father, who is 76.

James, who is 34, took the CEO job at BSkyB four years ago and has been aggressively expanding the business, which is controlled by News Corp., into new areas such as telephony and Internet connections. As chairman, James will succeed Rupert, while the company's current chief financial officer, Jeremy Darroch, will become CEO. Previously, James has overseen News Corp.'s U.S. Internet investments and its StarTV business in Asia.

Source - CNNMoney

Bush Subprime Mortgage Rate Freeze Stuns Bond Market

President George W. Bush's plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease.

If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages, said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.

Bush and Treasury Secretary Henry Paulson yesterday announced an agreement with lenders that will fix rates on some loans for five years. The deal will help borrowers who will fall behind once rates reset to higher levels through July 2010. The plan may force investors in the $6.3 trillion market for home- loan bonds, created by pooling loans and funneling interest payments to bondholders, to revalue their holdings.

It could end up there's less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody, said Kenneth Hackel, managing director of fixed- income strategy at RBS Greenwich Capital Markets.

Hackel said in an interview from his Greenwich, Connecticut, office that he has been fielding a lot of calls from clients pounding the tables and beating the drums.

Existing Contracts

The American Securitization Forum, the New York-based industry group that worked with regulators to forge the deal, said Bush's plan is designed to work within the existing contracts. As part of a typical bond contract, servicers are required to modify loans only when it would yield more cash to debtholders than a foreclosure. Agreements also state that loans can't be modified unless a default is reasonably foreseeable.

Servicers will be acting in the best interest of bond investors because foreclosures would cause greater losses, the ASF said in a statement yesterday. The ASF cautioned servicers against modifying more loans than allowed under some contracts.

The initial reaction of a lot of people including myself a week ago would have been, `Hey this isn't fair,' said Andrew Harding, chief investment officer for fixed income at Allegiant Asset Management in Cleveland, which manages $18 billion. It isn't fair but it most likely is in the best interest of both those who are making payments and those who can't make higher payments.

Mortgage securities and leveraged loans have already caused $66 billion of losses at the world's banks. Goldman Sachs Group Inc. estimated last month that losses in credit markets worldwide may reach $726 billion.

Foreclosures

Foreclosures almost doubled in October from a year earlier as borrowers with poor credit failed to make higher payments, Irvine, California-based RealtyTrac Inc. said Nov. 29. Credit Suisse Group analysts project 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years.

There's a glimmer of hope on the horizon, said Vivek Tawadey, a strategist at BNP Paribas SA in London. This should spark a relief rally across all financials. Whether this rally can be sustained over the medium term is the key question.

The agreement addresses homeowners unable to afford higher interest rates once starter rates increase. The options are freezing rates or refinancing into either a new private mortgage or a Federal Housing Administration-backed loan. As many as 1.2 million subprime, adjustable rate mortgage holders will be eligible for assistance under the plan.

Mortgage Resets

About $77 billion of subprime mortgages are due to reset higher in the first three months of next year, according to Bank of America Corp. analysts Hans Mikkelsen and Mike Cho in New York. The resets will continue at a pace in excess of $30 billion a month in the following four months, the analysts wrote in a note published yesterday.

The specter of rising interest rates will affect about $450 billion of subprime mortgages by the end of next year, according to bond research firm CreditSights Inc. in New York.

If investors all of a sudden feel that a contract can be changed at the whim of industry participants or at the jawboning of government, ultimately that could have the effect of cutting off capital, said Joshua Rosner, managing director at New York- based research firm Graham Fisher & Co.

Standard & Poor's said yesterday that freezing rates on subprime mortgage loans may lead to credit-rating reductions on some mortgage bonds. The government's plan may shrink the difference between interest payments received from home loans and the interest due to bondholders, S&P said in a report.

Source - Bloomberg

U.S. Mortgage Delinquencies Rise to 20-Year High

The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes.

The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, the Mortgage Bankers Association said in a report today. New foreclosures hit an all-time high for a second consecutive quarter.

The surge in foreclosures is expanding the inventory of unsold homes and contributing to the decline in housing demand. Sales of new and previously owned homes probably will drop to 5.09 million next year, 32 percent below the 2005 peak of 7.46 million, according to Frank Nothaft, chief economist of Freddie Mac, the second largest U.S. mortgage buyer. About 40 percent of lenders have increased standards for their most creditworthy borrowers, according to a Federal Reserve study in October.

These are the first numbers we've seen that combine the meltdown of the credit markets with the drop in home prices, said Jay Brinkmann, vice president of research and economics for the Washington-based bankers trade group.

Bush Plan

President George W. Bush and U.S. Treasury Secretary Henry Paulson plan to announce a proposal today to freeze some subprime mortgages to stop a wave of foreclosures that has cut prices and demand for houses.

As the U.S. housing slump enters its third year, investors are shunning securities backed by mortgages, the top 15 U.S. home builders have lost about $35 billion in market value this year, and the inventory of unsold houses has risen to almost an 11-month supply, the highest in 22 years.

One in every five adjustable-rate subprime loans had late payments in the quarter, a number that excludes the one of every 10 already in foreclosure, the bankers group said in their report. Foreclosures started on all types of mortgages rose to an all-time high of 0.78 percent from 0.65 percent.

In the quarter, 3.12 percent of prime borrowers made their mortgage payments at least 30 days late, up from 2.73 percent in the second quarter, the report said. The subprime share of late payments rose to 16.3 percent from 14.8 percent.

California, Florida Lead

The numbers were driven by California, the U.S.'s largest state, and Florida, Brinkmann said. The two states had 36.4 percent of all of the nation's prime adjustable-rate loans and had 42.4 percent of new foreclosures during the quarter, he said. They had 28.1 percent of subprime adjustable mortgages and 33.7 percent of foreclosure starts for that type of loan.

Sixty percent of banks said they tightened qualifications for in October for so-called non-traditional mortgages such as interest-only loans, the Fed said.

Housing permits in the U.S. have declined for five consecutive months, falling to a 14-year low of 1.178 million at an annual pace in October, the Commerce Department said in a Nov. 20 report.

Sales of previously owned homes fell to a rate of 4.97 million that month, the lowest in a study that goes back to 1999, the National Association of Realtors said Nov. 28. The inventory of single-family homes for sale increased to a 10.5 months' supply, the highest since July 1985.

The U.S. asset-backed commercial paper market has shrunk $394 billion, or 33 percent, since August. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other holdings fell $23 billion, or 2.8 percent, to a seasonally adjusted $801.2 billion for the week ended Dec. 5, the Federal Reserve in Washington said today.

Toll Brothers Inc., the largest U.S. luxury-home builder, today reported its first quarterly loss in 21 years as fiscal fourth quarter revenue slid 35 percent from a year ago to $1.17 billion. Net income for the full fiscal year plunged 95 percent to $35.7 million, the lowest since 1993.

The Mortgage Bankers report is based on a survey of 45.4 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

Source - Bloomberg