WASHINGTON -- The slump in housing has spread to other vital parts of the U.S. economy, including consumer credit, commercial real estate and manufacturing, according to a monthly survey of businesses by central bank officials.
The Federal Reserve Board's beige book survey, although largely anecdotal, paints a picture of an economy that is now clearly gearing down.
"Contacts in a number of industries indicated a higher than usual degree of uncertainty about the outlook for economic activity," the Fed said in a summary of the survey, which is based on information collected in September and early October.
The findings are in marked contrast to the previous survey, which concluded there was only "limited" evidence of spillover from housing.
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While the overall economy continues to expand, the pace of growth has "decelerated" since August in much of the country as the weakness spreads beyond housing, the Fed said. And that's raised the likelihood of another interest rate cut by the Fed when it meets Oct. 30-31 in Washington, economists said.
The odds of a quarter percentage-point rate cut now stand at 56 per cent, based on trading in federal funds futures. The Fed cut its benchmark rate by 50 basis points to 4.75 per cent in September in a bid to ease a credit crunch in the banking sector.
"The Fed is in the habit of forestalling calamity - financial or economic - and the one oozing from the housing sector should be more than sufficient for the Fed to ease again," economist Michael Gregory of BMO Nesbitt Burns said in a report to clients.
But economist Aaron Smith of Moody's Economy.com argued that the latest beige book doesn't "settle the case" for a rate cut. But he agreed that the economy is clearly slowing and there's no evidence that inflation would be an impediment for the Fed to act.
The Fed survey pointed out that tighter credit conditions are now being reported beyond mortgages, including consumer, commercial real estate and business loans.
Meanwhile, the recession in housing continues to get worse. Housing starts and permits fell to levels not seen in more than a decade, according to a U.S. government report released yesterday.
Starts fell 10 per cent to an annual rate of 1.19 million in September. That's down 31 per cent from a year ago and the lowest level in 14 years.
Starts are a key leading indicator because they trigger a whole host of consumer purchases - from furniture and appliances to a wide range of residential services.
Building permits, a prerequisite for starting construction, also fell in September - by 7 per cent to an annual rate of 1.23 million. That's the slowest pace since 1995.
Economist David Resler of Nomura Securities said the sobering part of the housing report is that there's no end in sight to the downturn. "Until the large inventory of unsold homes is pared substantially, declines in home building are likely to continue," he said.
Meanwhile, Standard & Poor's cut the credit ratings on $23.35-billion (U.S.) worth of subprime U.S. residential mortgage-backed securities yesterday. The credit rating agency cited deteriorating loan quality.
The downgrades affect less than seven per cent of the roughly $372-billion of bonds backed by subprime and other high-risk mortgages.
S&P also put hundreds of other classes of bonds on credit watch, a precursor to possible future downgrades. Subprime loans are those granted to borrowers with poor credit records, typically at higher interest rates and stricter conditions than a bank's best customers enjoy.
Reading the tea leaves
Mortgage defaults
Hit an annual rate of 1.5 million in September. That compares with 900,000 last year from fewer than 800,000 in 2005. At the current rate, more than one million Americans will lose their homes to foreclosure, making this the worst housing recession since the Second World War.
Housing starts
Sank to a 14-year low of 1.19 million in September. Starts are a vital economic engine, creating jobs and growth as people stuff their homes with sofas and TVs. Starts peaked at 2.3 million in early 2006, and the decline will be a drag on the rest of the economy until the slide stops.
Mortgages
A quarter of the roughly 50 million U.S. home mortgages are subprime. That's seven times the number of high-risk mortgages there were in 2001. That means that many more marginal homeowners have mortgages, making it far more likely they'll wind up in default.
House prices
Fell 3.2 per cent in the second quarter. Prices are falling faster and more broadly than they have in decades, according to the closely watched Case-Shiller index.
Gross domestic product
The broadest measure of the economy grew at 3.8 per cent in the second quarter. That's pretty good, but it predates the summer credit crunch, the stock market correction and another several months of the housing slump.
Retail sales
Grew 0.6 per cent from August to September. That's not bad. But if you take out rocketing food and energy prices, sales were virtually flat at 0.2 per cent. The economy is clearly slowing.
Barrie McKenna
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