U.S. home value plunged 25 percent from the peak

A closely watched gauge of U.S. home prices, the S&P Case-Shiller home-price index, showed accelerating price declines in November. Home values in 20 major U.S. cities fell a record 18.2 percent in the 12 months ending in November. No city experienced year-over-year price gains, the eighth straight month that has happened.

The Case-Shiller 20-city home price index fell 2.2 percent in November, with home values in all 20 cities falling at least 1 percent. None of the cities managed to avoid month-to-month declines for the second month in a row.

Phoenix, Las Vegas and San Francisco continued to lead decliners, all with year-to-year drops over 30 percent and monthly drops over 3 percent. The best performance over the past year was Dallas, where prices fell just 3.3 percent.

Prices are down 25 percent from the peak in mid-2006, according to Case-Shiller.

The Case-Shiller index tracks repeat sales on the same properties over time, but it closely tracks only 20 cities, not the whole country.

Falling home values have caused plunge in value mortgage-backed securities and created chaos in the global financial system. Home owners have lost trillions of dollars of wealth and banks have been stuck with mortgage-backed securities as they turned into toxic assets.

Bleak Outlook, Crude Oil at Five Year Low

A steep decline in crude-oil consumption, coupled with rising inventories, has pushed prices to a five-year low. After reaching record highs above 147 dollars in mid-July, by December 2008 inflation-adjusted crude-oil prices had sunk to their lowest levels since early 2004.

On December 19 the New York contract for January plunged to 32.40 dollars a barrel, lowest reading since February 9, 2004 as investors raced to sell before the contract's expiry. It ended the year 2008 at $44.6 a barrel in after-hours electronic trading on the New York Mercantile Exchange or 53.5 percent lower than a year ago, the first annual decline since 2001 and the biggest drop since futures trading started in 1983.


The outlook for oil remains weak. The International Energy Agency cut its world oil demand forecast by one million barrels a day on expectations a squeeze on energy consumption. In its grimmest forecast on demand in years, the Paris agency said it expected 2009 global crude demand to contract 0.6 percent after dropping 0.3 percent last year, the first two-year dip in consumption in 26 years, since 1982-83.

The Organization of Petroleum Exporting Countries (OPEC), which produces 40 percent of the world's crude, has also lowered its energy demand forecast for 2009, saying in its January report that it expects world demand for crude will fall 180,000 barrels per day in 2009 from the previous year.

Concerns center on the U.S., the world's largest consumer of oil, where falling consumer demand and rising unemployment are undermining demand for crude. Commercial crude-oil inventory in the U.S. has increased by nearly 10 percent since September.


Though global crude-oil demand has waned, the daily supply is still rising. OPEC has announced 4.2 million barrels a day of production cuts since September, moves that investors have so far ignored. OPEC has pledged to curb oil production. The wild card is oil producers outside OPEC, whether they increase output and if so, how much that will compensate for reduced supplies from OPEC nations.

Given the OPEC’s pledge, futures traders don’t expect prices to stay this low for long; they expect the price of oil to rise in 2009.

Consumer prices tumbled again, deflation concerns grow

Consumer prices tumbled yet again in December, and inflation last year logged its smallest advance since the early 1950s.

The Labor Department's latest inflation report, released Friday, showed consumer prices fell 0.7 percent in December, marking the third straight month prices fell. An 8.3 percent drop in energy prices led the consumer prices fall.

For all of 2008, prices increased just 0.1 percent, the smallest increase in 54 years, since 1954. Although prices spiked during some summer months as oil hit record highs and food prices marched upward, the inflation threat of 2008 ended up fizzling.

Core prices, which exclude food and energy prices, were flat in December for the second straight month, as expected. The core CPI was up 1.8 percent in 2008, the smallest increase since 2003.

Falling prices sound like a gift at first, at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investment and lay off workers.

America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems.

2.6 million U.S. jobs lost in 2008

Unemployment rate rises to 7.2%, the highest level in 16 years

American employers shed 524,000 jobs in December, bringing the total number of jobs lost in 2008 to 2.6m, the most since the end of the Second World War in 1945 when 2.75 million jobs were lost as the wartime economy was demobilized.

As a percentage of employment, job losses in 2008 totaled 1.8%, the worst since 1982 and the third-largest since the war.

The unemployment rate rose to 7.2% for the month, the highest in 16 years, with 11 million Americans out of work and searching

The Labor Department's unemployment report showed widespread damage across U.S. industries and workers. The damage hit blue-collar and white-collar workers, people without high school diplomas and those with college degrees.


The rise in unemployment has picked up in recent months as businesses have reacted to the plunge in consumer spending. The economy's weakness has forcing steeper cuts. The most severe losses in payrolls is projected to happen now and in the months ahead as companies slash costs and try to cushion their bottom lines.

The grim report will increase pressure on Congress to quickly pass a major fiscal stimulus package to prop up the economy. President-elect Barack Obama, who takes over Jan. 20, has suggested the government inject as much as $800 billion into the economy through huge package of tax cuts and government spending over the next two years.

Worst budget forecast, $1.2 Trillion Deficit

The Congressional Budget Office projected a $1.2 trillion federal government budget deficit for the fiscal 2009. The projected budget deficit is nearly two and a half times bigger than the previous record shortfall of $455 billion reached in 2008.

The budget office said its grim budget projection stemmed from the severe plunge of the economy, which it predicted would contract 2.2 percent in 2009 and register anemic growth in 2010. The budget would be pummeled by both falling tax revenue and rising costs for unemployment benefits, food stamps and other social programs that kick in as shock absorbers during a recession.

The agency’s deficit estimate included hundreds of billions of dollars in spending tied to risks and probable losses over time of the government’s existing bailout programs. The budget office also included all the money used in propping up Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies that the Treasury seized in September and put into a conservatorship. Those costs would add $240 billion to the deficit in 2009.

The shortfall this year could swell to $1.6 trillion if the budget estimate is combined with the huge economic stimulus package of tax cuts and new spending that Mr. Obama is preparing. Democratic leaders in Congress are more determined than ever to pass a stimulus package, which could amount to nearly $800 billion over two years, by Feb. 16.

The agency said the deficit would equivalent to 8.3 percent of gross domestic product, surpassing previous postwar record of 6 percent, reached in 1983 under President Ronald Reagan.

Credit:
Chart 1. by The New York Times
Chart 2. by The Economist