January 17, 2008 / 2:55 PM / 12 years ago

WRAPUP 3-U.S. housing, factory data raise recession fears

NEW YORK, Jan 17 (Reuters) - Factory activity in the U.S. Mid-Atlantic region contracted sharply in January and home building in December fell to the slowest pace since the early 1990s, according to reports on Thursday that reinforced fears of recession.

But Federal Reserve Chairman Ben Bernanke told lawmakers that even though the U.S. economy is facing difficulties, the Fed has not forecast a recession. He told a congressional committee that he supports efforts to craft a fiscal stimulus package and repeated that the Fed was ready to act aggressively to counter recession risks.

“Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone,” Bernanke told the U.S. House of Representatives Budget Committee.

The plunge in the Philadelphia Fed’s manufacturing index, to negative 20.9 in January from minus 1.6 in December, was far below even the most pessimistic Wall Street forecasts. The report is seen as a preview to a broader national manufacturing survey for January, due early next month.

“The Philly Fed index plunged into recession territory,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in Valhalla, N.Y. “This is very alarming, because we had pinned our hopes on the relative strength of the corporate sector offsetting some of the housing hit. This is bad.”

Jonathan Basile, an economist at Credit Suisse in New York, called the Philly Fed report “awful” and a harbinger of worse to come: “The notion of a recession continues to gain traction.”

It was a second straight month of retrenchment in the index, denoted by readings below zero, and was also the largest one-month drop since January 2001, just as the economy was on the cusp of its last recession.

A Reuters poll released on Thursday showed a survey of about 250 economists from the Group of Seven major developed economies believe the United States faces a 45 percent chance of recession.

Bernanke’s somber assessment of the economy and the big drop in the Philly Fed report drove stock prices and the dollar lower, while pushing bond prices higher on expectations of lower interest rates.


Government data on Thursday showed ground-breaking on new U.S. homes last month was the slowest since 1991 and fewer building permits were issued than any time since 1993, pointing to a deepening housing crisis.

Housing starts were at an annual pace of 1.006 million units in December, lower than the 1.140 million units economists expected. It was the slowest pace for housing starts since the May 1991 rate of 996,000 units.

“Housing starts make it look like we are in a recession, but jobless claims looks like we are in an expansion. These are mixed signals,” said Robert Brusca, chief economist at Fact and Opinion Economics in New York.

The Labor Department said the number of workers filing new initial claims for jobless benefits unexpectedly dropped by 21,000 last week.

Even so, there were signs people were still having trouble finding work. The number of so-called continued claims — those who still on benefit rolls after having drawn an initial week of aid — rose by 66,000 to 2.75 million in the week ended Jan. 5, the latest week for which figures were available.

First-time claims for state unemployment insurance benefits fell for the third straight week, to 301,000 — the lowest since Sept. 22 — in the week ended Jan. 12. That was down from 322,000 the prior week, the department said.

The four-week moving average of new claims — a more accurate gauge of labor market trends because it irons out volatility in the week-to-week figures — also fell for the third straight week, to 328,500 from 340,250 the prior week.

U.S. home building projects started in December fell 14.2 percent while permits for future building hit a 14-year low, according to the Commerce Department report. Building permits fell 8.1 percent to an annual rate of 1.068 million, the slowest pace since a 1.056 million unit rate in March 1993.

The 1.354 million units started in all of 2007 was the lowest since 1.288 million units in 1993.

The sharp reduction is a positive sign, Bank of America Securities analyst Daniel Oppenheim said, as it will help burn off the oversupply of homes already on the market.

In the previous two big housing downturns, in 1975 and 1982-1983, housing starts were in the range of 900,000 units per year for several months before rebounding.

“Builders are in trouble. They have a lot of inventory. They decided to cut back on their starts and that’s going to crimp the GDP,” said Brusca, at Fact and Opinion Economics.

There were 1.376 million permits issued in all of 2007, down 25 percent from the year-ago level and the lowest since 1.333 million permits in 1995. (Additional reporting by Nancy Waitz and Patrick Rucker in Washington, and Pedro Nicolaci da Costa in New York; Editing by Dan Grebler)

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