Words almost failed observers on both sides of the Atlantic yesterday as they reacted to the worst American economic data to emerge for some considerable time.
Consumer confidence slumped to the lowest level in almost two years and home prices scored their worst performance in 16 years, threatening US household spending, spurring talk of recession and prompting calls for the Federal Reserve to keep cutting interest rates. The Conference Board's index of consumer confidence fell more than forecast in September, to 99.8 from 105.6.
Meanwhile, the American National Association of Realtors said August sales of previously owned houses dropped 4.3 per cent, with inventories at exceptionally high levels, indicating that house sellers are not yet willing to reduce prices by as much as the collapse in demand would warrant.
Even so, the average US existing home sales price also fell in August, to $224,500 from $228,700 in July. The fall of $4,200 is equivalent to a 1.8 per cent month-on-month decline. This is the steepest drop in house prices for 16 years. Prices have risen by a mere 0.2 per cent since August 2006.
Confidence about employment prospects is also at a low ebb. The share of consumers who said jobs are plentiful decreased to 25.7 per cent from 27.5 per cent in August. The proportion of people who said jobs are hard to get increased to 22.1 per cent from 19.7 per cent.
Economists were uniformly gloomy about the numbers. "Hope of stabilization in US existing home sales has been blown to bits by terrible August data," Dimitry Fleming, of ING in London, remarked. "We doubt the recent Fed rate cut will manage to revitalize home demand any time soon. As long as prices remain in negative territory, buyers will continue playing the waiting game. At the current sales rate, it now takes a massive 10 months to clear the market.
"Hopes of a bounceback in employment after the shocking fall last month may prove misplaced. The expectations index, which is perhaps a more reliable indicator for future consumer spending, fell to only 85.2 from 89.2. We should not look for the consumer to bail out growth as they did at the end of 2006."
Richard Iley of BNP Paribas said: "A dismal report although it could have been worse. But worse is surely to come. The existing home sales data reflect demand/sales agreed 4-6 weeks previously. As a result, this report is firmly 'pre-turmoil'. Housing demand fell off a cliff in August and September. Existing homes sales could easily have fallen 25 to 30 per cent which would leave inventories in unprecedented territory."
Sarah Bloomfield at CEBR agreed, albeit with a flicker of optimism: "The housing market is showing no signs of bottoming out. If jobs continue to decline, as they did in August, this could put more pressure on confidence and increase the likelihood of a recession. However, the impact of the Fed's recent 50 point cut will not have fed through into these figures."
The decline in consumer sentiment also threatens America's beleaguered car giants, with Chrysler freshly in private equity hands and General Motors dealing with industrial action. Tighter credit conditions are causing consumers to postpone purchases of cars in particular, and no doubt when they do they will tend to downsize to the models favoured by the likes of Toyota and Honda. This is a particularly bearish development. The obvious worry is that the slump in US housing may be spreading to the wider US economy, with the particular threat that the sub-prime crisis will be further deepened, with higher default rates and higher negative equity making a difficult situation even more painful, for borrowers and lenders alike.
Should that happen there is bound to be some knock-on effect on the barely recovering credit markets, with the probability of still tighter lending criteria, higher market interest rates and yet more demand for emergency loans, injections of liquidity and bail-outs by the world's central banks.
The Fed's recent half a percentage point cut in interest rates was enough to prevent a decline in homebuilders' shares infecting the wider equity markets. However, the dollar fell to a new all-time low against the euro, and there is a rising hope that the Fed will have to act to prevent a slide to recession.
James O'Sullivan, a senior economist at UBS Securities in Stamford, Connecticut, said: "These numbers will encourage the Fed to cut rates again. The recession in housing is continuing, home prices are still falling and that's going to eat into housing wealth and home-equity extraction. The net result is we'll see sluggish consumer spending into 2008."
Futures prices on the Chicago Board of Trade indicated a 70 per cent likelihood the Fed will reduce its main rate to 4.25 per cent, from 4.75 per cent, by the end of the year.Reuse content