U.S. Economy: Goods Orders, Consumer Spending Tumble

By Timothy R. Homan and Shobhana Chandra

Nov. 26 (Bloomberg) -- U.S. business investment weakened last month and consumers are retrenching worldwide, reports today showed, heightening pressure on policy makers to take stronger steps to combat the credit squeeze.

Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001, while British households slashed expenditures last quarter by the most in 13 years, government agencies said today. A U.S. Commerce Department report showed orders for durable goods slumped twice as much as forecast as domestic and foreign demand dried up.

The intensifying global economic downturn spurred China’s central bank to cut its benchmark interest rate by the most in 11 years today, while the European Union proposed $259 billion in stimulus measures. In the U.S., President-elect Barack Obama held his third press conference in as many days to name former Federal Reserve Chairman Paul Volcker as an economic adviser.

“It’s about as bad as the 1970s and 1980s,” said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. “We’re looking at back-to-back very deep” slump in the global economy this quarter and next.

The decline in personal spending in the U.S. last month followed a 0.3 percent drop in September, the Commerce Department said today in Washington.

Adjusted for inflation, spending fell 0.5 percent, a fifth consecutive decrease. The last time price-adjusted spending dropped as many months in a row was in 1990-91.

Holiday Sales

Retailers are concerned about the November-December holiday season, which brings in one-third or more of annual revenue. Zale Corp., the biggest U.S. jewelry chain by stores, yesterday rescinded its annual forecast, saying in a statement that it “does not believe it can reliably gauge likely holiday performance or sales in the balance of fiscal 2009.”

Yields on 10-year Treasury notes fell to 2.98 percent at 5:15 p.m. in New York from 3.11 percent late yesterday. Yields on German 10-year bunds slid to 3.28 percent, the lowest close in almost three years.

The U.S. spending report showed incomes rose 0.3 percent after a 0.1 percent gain in September, and measures of inflation decelerated. The price gauge tied to purchases fell 0.6 percent in October and was up 3.2 percent from the same month in 2007. Stripping out fuel and energy, prices were unchanged on the month and up 2.1 percent from a year before.

The inflation rate in Germany, Europe’s largest economy, slowed more than forecast this month to 1.5 percent, the Federal Statistics Office said. That gives the European Central Bank greater leeway to keep cutting rates.

U.K. Spending

In Britain, government figures showed consumer spending fell 0.2 percent and fixed investment dropped by 2.4 percent in the third quarter from the previous three months. Europe’s second-largest economy suffered a 0.5 percent contraction in the period, the first decline in 16 years.

U.K. Chancellor of the Exchequer Alistair Darling this week pledged 20 billion pounds ($30 billion) of tax cuts and spending as the loan freeze and rising unemployment threatened to exacerbate the recession.

In the U.S., the Reuters/University of Michigan final index of consumer sentiment dropped to 55.3 in November, the lowest level since 1980.

Italian business confidence fell to the lowest in more than 15 years in November amid a recession in Europe’s fourth-biggest economy.

Postwar Low

“We’re probably going to cut our forecasts for U.S., Europe and world growth next year by at least” half a percentage point, said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “This is one of the worst recessions in the post-war period.”

The Fed will probably cut its benchmark rate by half a point, to 0.5 percent, and may lower it to zero, Behravesh said. Macroeconomic Advisers LLC, JPMorgan and HSBC Holdings Inc. analysts already predict a zero rate by January.

China’s central bank said it will lower its key one-year lending rate by 108 basis points to 5.58 percent effective tomorrow, extending efforts to prevent an economic slump less than three weeks after the government unveiled a 4 trillion yuan ($586 billion) stimulus plan.

China’s economy, the biggest contributor to global growth, will expand at the slowest pace in almost two decades next year, the World Bank forecast yesterday.

U.S. orders for durable goods, which are meant to last several years, slid 6.2 percent last month after a 0.2 percent drop in September, the Commerce Department reported. The median forecast of 72 economists in a Bloomberg News survey was for a 3 percent drop.

Durable Goods

Excluding demand for transportation equipment, which tends to be volatile, orders dropped 4.4 percent, also more than anticipated and the biggest decline since January 2002. Those bookings were projected to fall 1.6 percent, according to the Bloomberg survey.

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, decreased 4 percent, the biggest decline in almost two years. Shipments of those items, used in calculating gross domestic product, fell 2.4 percent following a 1.6 percent gain in September.

Following the durable-goods and spending reports, economists at Morgan Stanley in New York projected the U.S. economy would contract at a 5.1 percent annual pace this quarter, more than they previously anticipated.

“The capital-spending recession is just under way, where the consumer recession has been very well in train,” Cary Leahey, a senior U.S. economist at Decision Economics Inc. in New York, said in an interview with Bloomberg Television. “You have a very adverse one-two punch for the economy.”

Jobless Claims

The number of Americans filing first-time claims for unemployment benefits fell to 529,000 last week, while remaining close to the highest level since 1992, Labor Department figures showed. The four-week moving average for claims reached a 26- year high.

Obama this week warned of “millions” of additional job losses without a new stimulus plan. He called for a two-year package to undergird the economy, investing in infrastructure and energy projects and aiding the unemployed. “Help is on the way,” Obama said today.

The president elect, who takes office Jan. 20, spoke in Chicago to announce Volcker will lead a new White House panel aimed at reviving growth. He has already designated New York Fed President Timothy Geithner as his Treasury secretary and former Treasury chief Lawrence Summers to head the National Economic Council.

The European Union is coordinating a 200 billion-euro ($259 billion) stimulus for its 27-nation economy. The package, to which individual countries will contribute 170 billion euros, is equivalent to 1.5 percent of the region’s GDP.

‘Exceptional Crisis’

“We may even need more,” European Commission President Jose Barroso said in unveiling the proposal in Brussels today, adding that the plan was an “exceptional response” to an “exceptional crisis.”

Back in the U.S., a government report showed that the housing slump -- the trigger for the credit crisis and economic turmoil -- is intensifying.

Purchases of new houses dropped 5.3 percent to an annual pace of 433,000, lower than forecast and the fewest since January 1991, the Commerce Department said today in Washington. The median sales price decreased to a four-year low.

“We’re going from bad to worse,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who accurately forecast the drop in consumer spending in today’s report. “The recession is deepening.”

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