Tuesday, December 16, 2008

Consumer prices fall in November

This is from The New York Times:

Consumer prices fell at the fastest rate on record in November while home construction plunged nearly 20 percent in a single month, skidding to its lowest levels in 50 years, according to new government data that shows further weakness in the ailing economy.

The Labor Department reported Tuesday morning that consumer prices fell for the second consecutive month, and at the fastest rate since the government began keeping track in 1947.

Prices at cash registers and gas pumps across the country were a seasonally adjusted 1.7 percent lower in November from the month before, led downward by tumbling energy prices, which fell 17 percent over one month as the demand for gasoline and oil eclipsed.

The core rate of inflation, excluding volatile food and energy prices, was flat for the month.

The price of gasoline plunged 29.5 percent while the cost of fuel oil fell 13.6 percent. Food and beverage prices crept up 0.2 percent in November, their slowest rate of growth all year, while clothing prices were up 0.3 percent.

The unadjusted year-over-year inflation rate was 1.1 percent, the government reported.

In just six months, economists who had fretted about out-of-control inflation as oil peaked near $150 a barrel are now warning of deflation, with prices dropping as the economy grinds into a lower gear.

“I’ve never seen the economy slam on the brakes as much as it has in the last three months,” said Bill Hampel, chief economist at the Credit Union National Association. “And as the tires are squeaking on the pavement, that’s pulling prices down too.” Meanwhile, new data showed the nation’s housing market continuing to lag. The Commerce Department reported that housing starts fell to a seasonally adjusted 625,000 in November, far below Wall Street’s expectations.

The housing starts in November represented a 18.9 percent drop from the previous month and were 47 percent lower than November 2007. New-home construction in October was revised downward to 771,000 units from an earlier estimate of 791,000.

“This is mind-bogglingly awful,” Ian Shepherdson, United States economist at High Frequency Economics, wrote in a note. “The only consolation here is that unless sales drop much further from their already fantastically depressed level, the pace of new construction is so low that inventory will fall quickly. Right now, though, housing is still a disaster area.”

Looking at this story, and looking my previous posting on the Fed's interest rate cut to zero, nobody has any money left to spend. Banks are not lending any money out to Americans for purchasing homes, or even businesses to expand. Businesses are not asking for loans to expand their production of goods, not if consumer prices for goods are falling. Retail sales have fallen for the fifth straight month, with the Commerce Department reporting retail sales have dropped 1.8 percent in November. Americans are not spending their money on Christmas shopping, while businesses are trying to push their merchandise off the shelves with deep price discounts. The construction industry is still a wasteland, considering all the foreclosed homes on the market that the banks can't sell to cover their own subprime mortgage losses. And finally, we have the U.S. Treasury giving out gobs of nearly worthless dollars to the banks, praying that the banks would lend the money out. However, the banks are hoarding this money to cover their own losses in gambling on risky investment schemes backed by over-valued subprime mortgage assets. It is like an entire house of cards crumbling into a stinking pile of crap.

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