Market rally defies dismal economic data

Consumer spending, sales of homes slump

By David M. Dickson (Contact) | Thursday, November 27, 2008

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Stock markets shrugged off a slew of depressing economic data Wednesday to complete their biggest four-day winning streak since the Great Depression.

The rally in the Dow Jones Industrial Average and the S&P 500 came in spite of government reports of falling consumer spending, declining new-home sales, decreasing durable-goods orders and new jobless claims that remained at recessionary levels.

Shortly after the release of the last of the dismal reports, President-elect Barack Obama promised Americans that "help is on the way" for an economy already beset by clogged credit markets, rising unemployment, plunging home values, stagnating wages and shrinking 401(k)s.

At his third news conference on the economy in as many days, he announced the formation of an advisory board of economic experts headed by former Federal Reserve Chairman Paul Volcker, who had advised him during his presidential campaign.

The Dow recorded its fourth consecutive daily gain Wednesday, the first time since April that the Dow has achieved that feat. It climbed 247.14 points (2.9 percent) on the day to close at 8,726.61, which was 15.5 percent above its closing level last Thursday.

The Standard & Poor's 500 stock index gained 30.29 points (3.5 percent) to end Wednesday at 887.68. That was 18 percent above its close last Thursday.

Consumer spending plunged 1 percent in October, the Commerce Department reported. It was the fourth consecutive monthly decline in personal consumption, which accounts for more than 70 percent of total economic activity. It was also the biggest monthly retreat since the 2001 recession. Adjusted for price changes, consumer spending has now fallen five months in a row. That hasn't happened since the 1990-91 recession.

"Spending virtually crashed" in October, said Adam C. York, economic analyst at Wachovia Economics Group. "This sets up an extremely weak fourth quarter for spending and gross domestic product (GDP)."

After adjusting for inflation, personal income after taxes did increase 1 percent in October, but that followed larger declines in June, July and August and no change in September.

There was good news on inflation in the income and spending report. The Federal Reserve's preferred gauge for inflation, which excludes the volatile food and energy sectors, increased by only 2.1 percent over the past 12 months. That is very close to the Fed's "comfort zone," which lies between 1.5 percent and 2 percent. The downward movement in this gauge gives the Fed room to reduce short-term interest rates further when its policy committee meets next month.

Orders for durable goods, such as autos, appliances and capital equipment, plunged 6.2 percent in October, much steeper than economists expected. As a result, the outlook for business investment during the fourth quarter and early next year is not good.

"There was no Thanksgiving cheer in this durable-goods report," said Nigel Gault, chief U.S. economist for IHS Global Insight. "The bellwether indicator of capital-equipment demand fell 4 percent on the month." It was the third consecutive monthly decrease in that sector, the Commerce Department reported.

"We expect to see double-digit declines in business-equipment spending in both the fourth quarter and the first quarter," Mr. Gault said.

"The factory sector capsized in October," said Aaron Smith, an economist at Moody's Economy.com. "The most discouraging news was in the core capital-goods segment," he said. "The adjustment toward lower levels of credit-sensitive spending has made its way to business investment."

New-home sales dropped 5.3 percent in October, falling to an annual rate of 433,000. New-home sales last month were more than 40 percent below year-earlier levels, the Commerce Department reported. With the credit crunch depriving potential homebuyers of financing, sales of new homes reached their lowest level in 17 years.

Prices continued to fall in October for both new homes and existing homes. The median price for a new home in October dipped to its lowest level in four years.

After rising by 110 percent during the 7 1/2 years that ended in June 2006, when the housing market peaked, national home prices have retreated 21 percent, according to the S&P/Case-Shiller home-price index. Analysts expect home prices to continue falling well into 2009, worsening the tremendous blow to the U.S. economy that plunging home prices have already exacted.

There was also bad news in the labor market, where unemployment has reached a 14-year high of 6.5 percent. New claims for unemployment benefits last week remained above the recessionary level of 500,000. The four-week moving average of new jobless claims increased to 518,000, the Labor Department reported. That's the highest level since January 1983, when the economy was just emerging from its deepest postwar recession.

Earlier this week, Goldman Sachs forecast that the unemployment rate would reach 9 percent by the fourth quarter of next year.

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