Prices May Have Tumbled as Economy Sank: U.S. Economy Preview

By Bob Willis

Dec. 14 (Bloomberg) -- The cost of living in the U.S. probably fell in November by the most in six decades, while slumps in manufacturing and homebuilding worsened, sending the economy deeper into a recession, economists said before reports this week.

Consumer prices probably dropped 1.2 percent last month, the most since records began in 1947, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in almost a half century and factory output continued to slide.

Costs of oil and other raw materials plummeted last month as the credit crisis caused consumers to slash spending, prompting automakers to plead for a bailout. Tumbling sales have retailers cutting prices, setting the stage for the Federal Reserve this week to lower its key rate target to its lowest level ever.

“We’re going to have weak demand through most of 2009,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. “It’s going to be a long and severe recession.”

The Labor Department’s consumer-price report is due Dec. 16. Fuel, auto and building-material costs probably dropped last month, economists said, as consumer spending dipped.

A freefall in crude oil costs is feeding through to prices at the pump. A gallon of regular gasoline at the pump plunged 32 percent last month to $2.11, according to AAA.

Recessions and Inflation

“We had a bubble in oil, the bubble has burst,” David Wyss, chief economist at Standard & Poor’s in New York, said in an interview with Bloomberg Television. “One thing recessions are really good at is bringing down inflation.”

Core prices, which exclude food and energy, rose 0.1 percent last month after a 0.1 percent drop the prior month, according to the survey median.

The recession, already a year long, will continue to slow inflation. Consumer prices will probably rise just 0.7 percent in the 12 months ended in September 2009, the smallest year-over- year gain since 1962, according to economists surveyed last week by Bloomberg News.

Consumer spending will fall at a 4 percent annual pace in the current quarter, the most since 1980, and drop 1 percent for all of 2009, the economists forecast.

Weak spending, exacerbated by the worst credit crisis in seven decades, pushed car sales in November to their lowest level since 1982, underscoring calls for a government bailout for General Motors Corp. and Chrysler LLC.

‘Depression Levels’

“Sales are at depression levels,” Mike Jackson, chief executive officer at AutoNation Inc., the largest car dealer in the U.S., said in a Bloomberg Television interview from Fort Lauderdale, Florida, last week. “What’s needed is a restoration of credit” and a “stimulus package for the economy, including incentives for the auto industry and a bridge loan” for the automakers.

Cutbacks in auto production probably pushed down manufacturing output last month, economists said a report from the Fed tomorrow may show. Overall industrial production, which includes factories, mines and utilities, fell 0.9 percent in November, according to economists surveyed.

A report from the New York Fed the same day may show manufacturing in the state contracted in December at the fastest pace since records began in 2001. A similar report from the Philadelphia Fed on Dec. 18 may show regional activity shrank for a 12th time in 13 months.

Fed Action

The Fed on Dec. 16 is forecast to cut its overnight lending rate by a half percentage point to 0.5 percent, according to economists surveyed. The Fed, struggling to shore up credit markets and arrest the freefall in economic data, has slashed rates from 4.25 percent in December 2007, while using a host of unconventional methods to pump added cash into money markets.

The housing recession that triggered the credit crisis and the ensuing recession show no signs of abating. New-home starts in November dropped to a 730,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast to report the day of the Fed decision.

“More needs to be done” to stop the cascade of foreclosures that is deepening the housing crisis, Fed Chairman Ben S. Bernanke said in a speech in Washington on Dec. 4. “Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.”

A gauge of the economy’s course will point to continued weakness, economists project a private report on Dec. 18 will show. The New York-based Conference Board’s index of leading economic indicators probably fell 0.4 percent in November after declining 0.8 percent in October.

                         Bloomberg Survey

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Release                  Period    Prior     Median
Indicator                 Date               Value    Forecast
=================================================================
Empire Manu. Index       12/15      Dec.     -25.4     -27.3
Ind. Prod. MOM%          12/15      Nov.      1.3%     -0.8%
Cap. Util. %             12/15      Nov.     76.4%     75.6%
NAHB Housing Index       12/15      Dec.       9         10
CPI  MOM%                12/16      Nov.     -1.0%     -1.3%
Core CPI MOM%            12/16      Nov.     -0.1%      0.1%
CPI  YOY%                12/16      Nov.      3.7%      1.5%
Core CPI YOY%            12/16      Nov.      2.2%      2.1%
Housing Starts ,000’s    12/16      Nov.      791       735
Building Permits ,000’s  12/16      Nov.      730       700
Current Account $ Blns   12/17       3Q      -183.2    -179.0
Initial Claims ,000’s    12/18    Dec. 13     573       555
Cont. Claims ,000’s      12/18     Dec. 6     4429      4375
LEI  MOM%                12/18      Nov.     -0.8%     -0.4%
Philly Fed Index         12/18      Dec.     -39.3     -40.0
=================================================================

To contact the report responsible for this story: Bob Willis in Washington at bwillis@bloomberg.net