Prices Probably Decrease as Growth Slows: U.S. Economy Preview

By Timothy R. Homan

Sept. 14 (Bloomberg) -- Americans paid less for goods and services in August, manufacturing slumped and homebuilding sank deeper into a recession, signaling slower growth is taming inflation, economists said before reports this week.

Consumer prices probably fell 0.1 percent last month, the first drop since October 2005, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in 17 years and industrial production fell, other reports are also projected to show.

Some companies are cutting prices to revive demand as mounting job losses and the collapse in credit and home values cause consumers to retrench. At their meeting this week, Federal Reserve policy makers may signal that the benchmark interest rate will remain at 2 percent in coming months as the threat of inflation recedes and the economy weakens.

``Slowing growth helps put a cap on commodity and energy prices, so price pressures are likely to decelerate,'' said Maxwell Clarke, chief U.S. economist at IDEAGlobal Inc. in New York. ``It allows the Fed to put fears of inflation on the back burner. Growth will become the greater concern.''

The Labor Department's report on consumer prices is due Sept. 16. The retreat in energy prices and discounts by automakers and retailers to clear out unwanted stockpiles probably restrained the cost of living last month, economists said.

The average price of gasoline fell 7.8 percent last month compared with July, according to AAA.

Core prices, which exclude food and energy, rose 0.2 percent last month after a 0.3 percent gain, according to the survey median.

Sales Drop

Sales at U.S. retailers dropped in August for a second straight month and July inventories at American businesses increased the most in four years, Commerce Department reports showed last week.

J.C. Penney Co. and American Eagle Outfitters Inc. promoted discounts on clothes to attract more shoppers during August to counter what may be the worst back-to-school season in seven years.

General Motors Corp. offered all customers the same prices paid by employees, helping boost sales in the second half of the month. GM this month said it will extend the incentive through September and has offered 72-month, no-interest financing on some vehicles since late June.

Less Construction

The worst housing recession in a quarter-century is also weighing on consumers. New-home starts in August dropped to a 950,000 annual pace, the lowest level since March 1991, the Commerce Department is forecast to report Sept. 17.

Builders scaled back to offset a record number of foreclosures that added to an inventory glut, economists said. Starts have fallen 30 percent in the past year.

Confidence among homebuilders this month probably edged up from August's 23-year low, economists said before the release of the National Association of Home Builders/Wells Fargo index, set for Sept. 16. The measure dates back to 1985.

Production at factories, mines and utilities dropped 0.3 percent in August following a 0.2 percent gain in July, economists forecast a Fed report tomorrow will show. Automakers probably led the decline as sales over the last three months plunged to the lowest level since 1993.

A report from the New York Fed the same day may show manufacturing in that state grew at a slower pace this month as domestic demand weakened and economies in Europe and Japan faltered. A similar report from the Philadelphia Fed on Sept. 18 may show regional activity shrank for a 10th straight month.

Negative Signal

A closely watched gauge of the economy's course dropped in August for a third straight month, economists project a report on Sept. 18 will show. The New York-based Conference Board's index of leading economic indicators probably fell 0.2 percent after decreasing 0.7 percent in July.

The Fed last month kept the benchmark U.S. interest rate at 2 percent for a second consecutive meeting. There is a one-in- four chance the central bank will lower the borrowing cost by its Oct. 29 meeting, according to futures trading. The odds of a cut improve to about 40 percent by their last meeting of the year on Dec. 16.

``The inflation outlook is now much less of a concern,'' said Paul Ashworth, international economist at Capital Economics Ltd. in London. At the same time, ``the weakness in the real economy is intensifying.''

                        Bloomberg Survey

================================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Empire Manu. Index        9/15     Sept.      2.8       1.0
Ind. Prod. MOM%           9/15      Aug.      0.2%     -0.3%
Cap. Util. %              9/15      Aug.     79.9%     79.6%
CPI  MOM%                 9/16      Aug.      0.8%     -0.1%
Core CPI MOM%             9/16      Aug.      0.3%      0.2%
CPI  YOY%                 9/16      Aug.      5.6%      5.5%
Core CPI YOY%             9/16      Aug.      2.5%      2.6%
Core CPI SA Index         9/16      Aug.    216.230     n/a
CPI NSA Index             9/16      Aug.    219.964   219.340
Net Long Term TICS $ Bl   9/16      July      53.4      55.0
Total TICS $ Blns         9/16      July      51.1      40.0
NAHB Housing Index        9/16     Sept.       16        17
ABC Conf Index            9/16    Sept. 15    -47       -43
Housing Starts ,000's     9/17      Aug.      965       950
Building Permits ,000's   9/17      Aug.      937       925
Current Account $ Blns    9/17       2Q      -176.4    -180.0
Initial Claims ,000's     9/18    Sept. 6     445       440
Cont. Claims ,000's       9/18    Aug. 30     3525      3528
Philly Fed Index          9/18     Sept.     -12.7     -10.0
LEI  MOM%                 9/18      Aug.     -0.7%     -0.2%
=============================================================================

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net