US housing slide worsens; Spain joins recession club

[Naveed Yaseen]

WASHINGTON (December 24 2008): The US housing market took a sharp turn for the worse while Spain joined a growing list of countries in a recession that shows no sign of abating. Existing US home sales and prices both fell at a record pace last month, according to a report released on Tuesday, further evidence that the financial turmoil which intensified in September was driving consumers deeper into retreat.

"The quickly deteriorating conditions in the job market, stock market and consumer confidence in October and November have knocked down home sales to another level," said Lawrence Yun, chief economist for the National Association of Realtors.

Sales of newly built US homes slowed to the weakest level since 1991, according to separate figures from the Commerce Department. Housing is at the root of the year-long US recession and the global malaise, and economists see little hope of a lasting recovery until that market stabilises. If it deteriorates significantly, that would increase foreclosures and bank losses, putting greater strain on government efforts to revive growth.

Modest US stock market gains evaporated after the housing data was released, pushing the Dow Jones industrial average down 0.6 percent in afternoon trading. European shares closed flat, while Tokyo's market was closed for the emperor's birthday.

The US economy shrank at an unrevised 0.5 percent rate in the third quarter, official data showed. Consumer spending plunged 3.8 percent, the biggest drop since 1980. "The bottom line: Bah humbug. Recession, recession, recession," said Jennifer Lee, an economist with BMO Capital Markets in Toronto.

Economists expect a much bigger decline in economic activity in the current quarter as job losses pile up and households and businesses curtail spending. That in turn is hurting US trading partners around the world.

An economist at the San Francisco Federal Reserve Bank said the US recession would likely last 18 months, making it the longest since World War Two, with unemployment peaking at a 25-year high of 8.4 percent.

JOIN THE CLUB: Britain, Spain and New Zealand added to evidence that global stimulus measures, bank bailouts and deep interest rates cuts may not prevent the worst downturn in decades. The British economy shrank 0.6 percent in the third quarter, the worst quarterly decline since 1990 and a deeper drop than the earlier 0.5 percent estimate.

New Zealand's economy declined a seasonally adjusted 0.4 percent in the third quarter, the biggest drop in eight years, following a 0.2 percent fall in the previous quarter. Spain succumbed to recession for the first time in 15 years. Spain's ISA activity indicator, which tracks gross domestic product, contracted 1.5 percent year-on-year between October and December, according to Economy Ministry data.

"The ISA shows the trend, and the trend is that the fall in fourth quarter GDP is going to be steeper than in the third," a ministry spokeswoman said. Governments around the world have ramped up spending to try to cushion the blow of the worst financial crisis in 80 years, a policy underscored by a second day of record-large government debt sales in the United States.

The US government sold $28 billion worth of 5-year notes, after a $38 billion 2-year note auction on Monday. Both drew bids worth about twice as much as the amount on offer, suggesting that at least for now there were enough willing buyers to soak up the growing debt supply.

Even more stimulus is on the way when US President-elect Barack Obama takes office next month. His staff is discussing how much money Congress should authorise for a package that is likely to be well over $600 billion.

Lawrence Summers, Obama's pick to head the White House National Economic Council, said without prompt action on a stimulus package "we will almost certainly face the worst economic downturn since the second World War."

Governments should be ready to increase their spending on economic programs if circumstances require it, the International Monetary Fund's chief economist Olivier Blanchard said in comments published on Tuesday. "The coming months will be very bad. Halting this loss of confidence, providing stimulus and, if necessary, replacing private demand are essential if we want to prevent the recession from becoming a Great Depression," Blanchard told French newspaper Le Monde.

The US economy shrank in the third quarter, official data confirmed Tuesday, as the IMF's top economist warned of a second Great Depression offering no respite from relentless gloom ahead of Christmas.

The abrupt 0.5-percent contraction of gross domestic product (GDP) in the world's largest economy was seen as marking the start of a steep downturn for the United States after GPD growth of 2.8 percent in the second quarter.

Stocks on Wall Street rose in early trading however as the contraction had been expected and was unrevised from a previous estimate. The Dow Jones Industrial Average was up 0.54 percent and the Nasdaq rose 0.60 percent. "This report is largely old news," said John Ryding at RDQ Economics, who forecast fourth-quarter data out next month would be far bleaker.

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