U.S. November Existing-Home Sales Probably Matched Record Low

Sales of existing homes in the U.S. matched a record low in November, a sign the housing recession will continue to weigh on the economy in 2008, economists said before a report today.

Purchases were unchanged at a 4.97 million annual pace for a second month, according to the median forecast of 53 economists surveyed by Bloomberg News. That's down 31 percent from their September 2005 peak.

``Demand for housing will remain weak,'' said Brian Bethune, an economist at Global Insight Inc., a Lexington, Massachusetts forecasting firm. ``We don't expect any major change in the overall trend in housing.''

Mortgage loans have become harder to get since banks tightened lending guidelines after the collapse in the subprime market, suggesting sales will keep falling. Rising foreclosures are adding to the glut of unsold homes, pulling down home prices and posing a threat to consumer spending, economists said.

The report from the National Association of Realtors is due at 10 a.m. in Washington. Economists' forecasts ranged from 4.7 million to 5.15 million.

Declines in home construction have detracted from growth for the last seven quarters and are likely to keep weighing on the expansion, according to Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York.

``The housing pain looks likely to continue through 2009,'' Harris wrote in a Dec. 20 note to clients. He predicted ``sales and starts to fall through the middle of 2008, gradually rising in 2009.''

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in October from a year earlier, the biggest decline in at least six years, according to the S&P/Case-Shiller home price index issued last week. Lehman Brothers is forecasting prices will fall at least 15 percent from peak to trough.

Falling prices leave owners feeling poorer and less likely to borrow against home equity to finance purchases. Consumer spending, which accounts for more than two-thirds of the economy, may grow at a 1.5 percent pace in the fourth quarter, almost half the rate of the previous three months, economists surveyed by Bloomberg forecast.

The odds of a recession in the next 12 months rose to 39 percent in December from 33.6 percent the prior month, according to the median forecast of economists surveyed by Blue Chip Economic Indicators. The last recession was in 2001, when the economy grew 0.8 percent.

Sales Slump

Sales of new homes, which make up about 15 percent of the market, fell 9 percent in November to a 12-year low, the government said Dec. 28. Purchases were down 53 percent in November from their July 2005 peak. Existing homes make up the remainder of the market.

Sellers are cutting prices and builders are scaling back projects to trim a glut of inventories of unsold homes. At the current sales pace, it would take 10.8 months to sell all the existing homes on the market in October.

``Once we are through absorbing the excess inventory, the supply that's in the marketplace, we will go back to doing good business,'' Robert Toll, chief executive officer of Toll Brothers Inc., the largest luxury-home builder, said on a conference call earlier this month. ``This downturn may be our toughest yet,'' said Toll.

                        Bloomberg Survey

==============================================
                        Exist Home Exist Home
                            Sales    Sales
                         Millions     MOM%
==============================================

Date of Release              12/31    12/31
Observation Period            Nov.     Oct.
----------------------------------------------
Median                        4.97      0.0
Average                       4.96     -0.1
High Forecast                 5.15      3.6
Low Forecast                  4.70     -5.4
Number of Participants          53       53
Previous                      4.97     -1.2
----------------------------------------------
4CAST Ltd.                    5.05      1.6
Action Economics              5.03      1.2
Analytical Synthesis          4.70     -5.4
Argus Research Corp.          5.00      0.6
Banc of America Securitie     5.02      1.0
Bank of Tokyo- Mitsubishi     4.95     -0.4
Barclays Capital              5.00      0.6
BMO Capital Markets           5.00      0.6
BNP Paribas                   5.15      3.6
Briefing.com                  5.00      0.6
Calyon                        4.90     -1.4
CIBC World Markets            4.97      0.0
Citi                          5.02      1.0
ClearView Economics           4.80     -3.4
Commerzbank AG                4.90     -1.4
Credit Suisse                 4.95     -0.4
Daiwa Securities America      4.90     -1.4
Desjardins Group              4.80     -3.4
Deutsche Bank Securities      4.95     -0.4
Dresdner Kleinwort            5.00      0.6
First Trust Advisors          5.07      2.0
Global Insight Inc.           4.96     -0.2
Helaba                        4.93     -0.8
HSBC Markets                  5.05      1.6
IDEAglobal                    4.90     -1.4
Informa Global Markets        5.00      0.6
Insight Economics             4.85     -2.4
Intesa-SanPaulo               5.00      0.6
J.P. Morgan Chase             5.00      0.6
Janney Montgomery Scott L     4.93     -0.8
JPMorgan Private Client       4.94     -0.6
Landesbank Berlin             5.00      0.6
Maria Fiorini Ramirez Inc     5.00      0.6
Merrill Lynch                 4.95     -0.4
Moody's Economy.com           4.89     -1.6
Morgan Stanley & Co.          4.95     -0.4
National City Bank            5.05      1.6
Natixis                       4.90     -1.4
Nomura Securities Intl.       4.95     -0.4
PNC Bank                      4.80     -3.4
RBS Greenwich Capital         4.97      0.0
Ried, Thunberg & Co.          5.00      0.6
Scotia Capital                5.00      0.6
Societe Generale              5.00      0.6
Stone & McCarthy Research     4.96     -0.2
Thomson Financial/IFR         4.97      0.0
UBS Securities LLC            5.02      1.0
University of Maryland        5.04      1.4
Wachovia Corp.                4.95     -0.4
Wells Fargo & Co.             5.03      1.2
WestLB AG                     4.95     -0.4
Westpac Banking Co.           4.97      0.0
Wrightson Associates          5.00      0.6
==============================================

Dollar Heads for Annual Decline Versus Euro, Yen on Economy

The dollar headed for the second straight annual decline against the euro and snapped two years of gains versus the yen as traders increased bets the Federal Reserve will cut rates again to halt an economic slowdown.

The dollar has declined against 14 of the 16 most active currencies this year as the Fed lowered borrowing costs three times because of a slumping housing market. A report today will probably show sales of existing homes in November stayed at the lowest level since the National Association of Realtors began keeping the records in 1999.

``The U.S. economy is still slowing,'' said Lee Wai Tuck, a currency strategist at Forecast Singapore Ltd. ``The Fed is likely to cut rates in January. It puts the dollar under downward pressure.''

The dollar was at $1.4734 per euro at 9:27 a.m. in Tokyo, down 11 percent this year. It reached $1.4967 on Nov. 23, the lowest since the euro begun trading in 1999. The U.S. currency lost 5.7 percent this year to 112.27 yen and reached a two-week low of 112.25 yen. Japan's currency traded at 165.43 per euro, having declined 5.3 percent to head for an eighth straight annual loss.

The dollar may decline to $1.4780 per euro and 112.10 yen today, Lee forecast. Currency trading will be less than 50 percent of normal levels today because of the holiday in Japan, Indonesia, Thailand and the Philippines, Lee said.

Odds the Fed will cut its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting increased to 90 percent from 80 percent a week earlier, according to futures on the Chicago Board of Trade.

The level of existing home sales in November was probably 4.97 million, unchanged from the month before, according to the National Association of Realtors which will release the report at 10 a.m. in Washington. A report on Dec. 28 showed sales of new homes in the U.S. fell to a 12-year low.

Oil Rises as Iran Plans Reactor Start, Australian Fields Close

Crude oil rose in New York as Iran plans to start a nuclear reactor next year, raising concern the move will heighten a confrontation with the U.S.

Oil also gained after some fields off Australia shut down because of a cyclone.

Crude oil for February delivery climbed as much as 45 cents, or 0.5 percent, to $96.45 a barrel in electronic trading on the New York Mercantile Exchange. It was at $96.42 at 8:20 a.m. Singapore time. Oil has risen 58 percent this year, heading for its biggest annual gain in eight years.

U.S. Holiday Internet Sales Rise at Slowest Pace Ever

Internet sales by U.S. retailers rose at the slowest pace on record as $3-a-gallon gasoline and rising mortgage defaults weighed on holiday spending.

Online spending from Nov. 1 through Dec. 27 increased 19 percent to almost $28 billion, from $24 billion a year earlier, Reston, Virginia-based ComScore Inc. said today in a statement. Sales growth trailed last year's 26 percent.

Discounts by Wal-Mart Stores Inc., the world's largest retailer, and Best Buy Co., the biggest U.S. consumer electronics chain, weren't enough to get consumers to loosen their purse strings. The Reuters/University of Michigan final index of consumer sentiment for December dropped to 75.5, the lowest since October 2005.

``Uppermost on the mind of consumers was the price tag,'' Kurt Barnard, president of Barnard's Retail Forecasting in Nutley, New Jersey, said in an interview. ``This made for a very difficult holiday season.''

Shoppers waited for discounts as online sales the day after Christmas totaled $545 million, more than double revenue on the same day in 2006. Consumers ``were willing, and able, to take advantage of late-season promotions and price discounts,'' ComStore Chairman Gian Fulgoni said in the statement.

ComScore hasn't recorded online sales growth of less than 20 percent since it began reporting the figures in 2002. Wal-Mart, Best Buy and Circuit City Stores Inc. offered discounts of 50 percent or more and promoted savings for in-store pickup of products purchased online to attract shoppers.

Internet Shopping

Spending through Web sites, which makes up more than 3 percent of all retail sales, may climb to $29.5 billion in November and December, ComScore estimated. That's less than the 26 percent growth in online sales during the holidays in 2006.

The slower growth mirrors the patterns in traditional retail sales. The 2007 holiday shopping season's sales may increase at the slowest pace in five years as consumers tightened household budgets because of record high oil and declines in home prices. Spending in November and December may rise 4 percent this year, according to National Retail Federation estimates.

Customer visits at U.S. stores declined for the fourth- straight week in the seven days through Dec. 22, the latest period reported on by Chicago-based ShopperTrak RCT Corp. Shoppers curtailed trips to malls in reaction to higher gasoline costs. Consumer traffic to retail locations fell 11 percent that week, the research firm said.

Retailers typically count on November and December for ringing up a fifth of their annual sales.

Unemployment May Rise, Factories Slow: U.S. Economy Preview

Employers in the U.S. hired fewer workers in December and the unemployment rate rose, signaling one of the few remaining bright spots in the economy dimmed heading into 2008, economists said before reports this week.

Payrolls rose by 70,000 after increasing 94,000 in November, according to the median forecast in a Bloomberg survey of economists before a Jan. 4 government report. The jobless rate probably rose to 4.8 percent, the highest level in more than a year.

The figures may raise concern that wage gains, which have kept American consumers afloat, will weaken in coming months. Other reports this week are likely to show existing-home sales matched a record low in November and manufacturing almost stalled this month, suggesting the housing recession was spreading throughout the economy heading into the new year.

``In a slow-motion fashion, we're beginning to see more spillover,'' from the real-estate slump, said Edward McKelvey, senior U.S. economist at Goldman, Sachs & Co. in New York. ``It will be the dominant issue of '08.''

The December gain would put the total payroll increase for 2007 at 1.4 million, the fewest in four years. The jobless rate stood at 4.5 percent at the end of 2006.

The hiring slowdown became more pronounced as the year progressed and the housing slump deepened. An average 147,000 jobs a month were created from January through May, compared with 94,000 in the six months to November.

Housing's Influence

Residential construction has fallen for seven consecutive quarters, weakening job growth as builders, mortgage companies and manufacturers reduce staff.

The collapse of the subprime mortgage market in August hastened firings at financial companies. Seattle-based Washington Mutual Inc., the largest U.S. savings and loan, said earlier this month it will eliminate 3,150 jobs as mortgage losses increased.

Manufacturers are also cutting back as sales of building materials, appliances and furniture weaken, reflecting the slump in home sales.

Factory payrolls shrank by 15,000 workers this month, economists said the jobs report may show. That would cap an almost 200,000 drop in manufacturing employment for the year.

The Institute for Supply Management's factory index fell to 50.5 this month, an 11-month low, from 50.8 in November, the Tempe, Arizona-based group may report Jan. 2, according to economists surveyed. A reading of 50 is the dividing line between expansion and contraction.

Services to Slow

ISM's index of service industries that make up the nearly 90 percent of the economy may have dropped to the lowest level since March. The non-manufacturing gauge fell to 53.5 in December from 54.1 the prior month, according to a Bloomberg survey. The report is due Jan. 4.

The world's largest economy will grow at a 1 percent pace in the fourth quarter after expanding at a 4.9 percent rate the previous three months that was the strongest since 2003, according to the median estimate of economists surveyed earlier this month. Growth for all 2008 is projected at 2.3 percent.

A report tomorrow from the National Association of Realtors may show existing home sales in November were unchanged at an annual rate of 4.97 million units for a second month, according to the survey median. That's the lowest since the Realtors began keeping records in 1999 and 31 percent down from a September 2005 peak.

Risk to Spending

The weaker housing market is forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

Retailers have placed fewer orders with Black & Decker Corp. this quarter because consumers are buying fewer tools for home remodeling projects as the housing slump enters its third year.

``We are seeing the U.S. economy slowing,'' said Alexander M. Cutler, chief executive officer at Eaton Corp., the world's second-largest maker of hydraulic equipment, in a Dec. 21 interview.

So far, income gains have helped prevent a collapse in consumer spending. The Labor Department is forecast to report hourly wages grew 0.3 percent on average in December after rising 0.5 percent the prior month. Year-over-year, average hourly wages probably rose 3.6 percent after a 3.8 percent gain in the prior 12-month period, economists said.

Investors project the Federal Reserve will lower its benchmark rate a quarter point at the end of January, its fourth consecutive rate decline since September, as it seeks to head off recession.

Minutes of the Fed's Dec. 11 meeting, when policy makers lowered the target rate to 4.25 percent, will be issued on Jan. 2. At the time, some investors were disappointed the central bank didn't drop the rate even more.

                        Bloomberg Survey

===========================================================
                       Release    Period    Prior Median
Indicator                 Date               Value Forecast
===========================================================
Exist Home Sales Million 12/31      Nov.      4.97    4.97
ISM Manu Index            1/2       Dec.      50.8    50.5
Construct Spending MOM%   1/2       Nov.     -0.8%   -0.4%
Initial Claims ,000's     1/3     Dec. 30     349      345
Factory Orders MOM%       1/3       Nov.      0.5%    0.5%
Nonfarm Payrolls ,000's   1/4       Dec.       94       70
Unemploy Rate %           1/4       Dec.      4.7%    4.8%
Manu Payrolls ,000's      1/4       Dec.      -11      -15
Hourly Earnings MOM%      1/4       Dec.      0.5%    0.3%
Hourly Earnings YOY%      1/4       Dec.      3.8%    3.6%
ISM NonManu Index         1/4       Dec.      54.1    53.5
==========================================================

U.S. Stocks Decline, Poised for Worst Fourth Quarter Since 2000

U.S. stocks fell and were poised for their first fourth-quarter decline since 2000 after government reports on durable goods and unemployment reinforced speculation the housing-market collapse will push the economy into recession.

Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. dropped after Goldman Sachs Group Inc. analyst William Tanona predicted the firms may write down an additional $34 billion of assets linked to subprime mortgages. KB Home and Macy's Inc. led builders and retailers lower after falling home prices and sales heightened concern that sinking property values will slow consumer spending.

Lower-than-forecast orders for durable goods in November and an unexpected rise in jobless claims last week added to evidence that the housing slump is spreading to the broader economy. The Standard & Poor's 500 Index has declined 3.2 percent since the end of September, paring its 2007 advance to 4.2 percent.

``It's a struggle right now,'' said Edward Hemmelgarn, who oversees about $350 million as president of Shaker Investments Inc. in Cleveland. ``If you look at the economic news, most of it is more negative.''

The S&P 500 dropped 0.4 percent to 1,478.49 this week. The Dow Jones Industrial Average slipped 0.6 percent to 13,365.87. The Nasdaq Composite Index lost 0.7 percent to 2,674.46.

The declines left the S&P 500 5.5 percent below its all-time closing high of 1,565.15 on Oct. 9. The index has rebounded 5.1 percent in a month as traders boosted bets the Federal Reserve will reduce interest rates next year to stoke the economy.

Cars, Aircraft

The Commerce Department said two days ago that orders for cars, aircraft and other items made to last several years increased 0.1 percent last month, less than the 2 percent median economist estimate in a Bloomberg survey. The number of Americans filing first-time claims for unemployment insurance increased by 1,000 to 349,000, the Labor Department reported. Economists forecast initial claims would fall to 340,000.

Citigroup, the biggest U.S. bank by assets, dropped 3.1 percent to a five-year low of $29.29. JPMorgan, the third-biggest lender, declined 1.9 percent to $43.26. Merrill, the world's largest brokerage, lost 4.6 percent to $52.97.

Citigroup may reduce the value of its holdings by $18.7 billion in the fourth quarter and cut its dividend 40 percent to preserve capital, Goldman's Tanona said in a Dec. 26 report. JPMorgan may write off $3.4 billion, while Merrill may reduce its holdings by $11.5 billion, the analyst wrote.

Homebuilders Drop

Losses and writedowns at the world's biggest banks and securities firms total $97 billion this year, according to data compiled by Bloomberg. Financial shares in the S&P 500 dropped 1.4 percent this week, bringing their 2007 decline to 21 percent. That's the biggest annual plunge since 24 percent in 1990.

KB Home, the fifth-biggest U.S. homebuilder by sales, lost 7.8 percent to $21.08. Home prices in 20 U.S. metropolitan areas fell 6.1 percent in October, the most in at least six years, according to the S&P/Case-Shiller home-price index. Sales of new homes in the U.S. fell 9 percent, more than estimated, to a 12- year low in November, the Commerce Department said.

Home prices may keep falling as record foreclosures put even more properties on the market while stricter lending rules make it more difficult to get financing. Declining values pose a risk to consumer spending by making it harder for owners to tap home equity for extra cash.

Macy's, owner of the namesake chain and Bloomingdale's, lost 4 percent to $25.48. The company said yesterday it is closing nine stores with inadequate sales and eliminating 899 jobs.

Look Ahead

Reports next week on job growth, existing home sales and manufacturing will give investors further clues on the outlook for growth and borrowing costs. Odds that the central bank will cut its benchmark lending rate by a quarter-point increased to 90 percent from 80 percent a week ago, based on Fed funds futures.

Employers in the U.S. probably added 70,000 jobs in December, while the unemployment rate increased to 4.8 percent, according to the median economist forecasts in a Bloomberg survey. Manufacturing this month probably grew at the slowest pace since January, while sales of previously owned homes in November held steady after eight months of declines, economists said.

``We're approaching coin-toss status on whether we go into a recession or not,'' said Michael Mullaney, who helps oversee $10 billion at Fiduciary Trust Co. in Boston. ``We have some reservations about the strength of the market.''

Treasury yields fell for a second straight week. The benchmark 10-year note's yield dropped 0.10 percentage point to 4.07 percent.

Dollar Posts Biggest Decline Versus Euro Since 2006 on Housing

The dollar posted its biggest weekly drop against the euro since April 2006 as a slumping housing market and upheaval in Pakistan made U.S. financial assets less attractive to international investors.

The U.S. currency fell against all 16 most-actively traded currencies except Mexico's peso this week as traders raised bets that the Federal Reserve will cut borrowing costs in January. The dollar has lost 10.4 percent against the euro and 5.7 percent versus the yen in 2007, and the European currency is up 5.2 percent versus the yen, its eighth annual increase.

``The dollar is like a sore thumb getting hit by a hammer,'' said Brian Dolan, chief currency strategist at Forex.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. ``U.S. housing data shows no signs of any bottom in sight.''

The U.S. currency fell 2.4 percent this week to $1.4723 per euro, 1.5 percent to 112.28 yen and 2.5 percent to 1.1263 Swiss francs. The dollar touched $1.4728 per euro, 112.28 yen and 1.1259 Swiss francs, the lowest levels since mid-December.

Sweden's krona and Norway's krone led gains against the dollar this week, rising more than 2.8 percent. The Australian currency advanced 0.5 percent, the pound strengthened about 1 percent and the New Zealand currency increased 1 percent.

The U.S. currency weakened yesterday after the Commerce Department reported that sales of new homes in the U.S. fell to a 12-year low last month. Purchases dropped 9 percent to an annual rate of 647,000, and October sales were revised down to a 711,000 pace.

Home Prices

Home prices in 20 U.S. metropolitan areas decreased 6.1 percent in October, the S&P/Case-Shiller home-price index showed Dec. 26. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Investors also sold the dollar after former Prime Minister Benazir Bhutto died of injuries sustained in a Dec. 27 attack on an election rally in Pakistan. She was buried yesterday in her ancestral village, and troops were deployed to quell riots in several cities. The government said al-Qaeda may be behind Bhutto's killing and ordered a judicial inquiry.

``The combination of soft U.S. data and geopolitical risks led to dollar weakness,'' said Richard Franulovich, a senior currency strategist in New York at Westpac Banking Corp. ``Data from the U.S. continued to show weakness.''

The pound fell to a record low of 73.89 pence per euro yesterday after a U.K. report showing falling house prices increased speculation that the Bank of England will cut interest rates from 5.5 percent. The pound lost 1.8 percent against the euro this week, the most since September.

Swiss Franc

The Swiss franc increased against 14 of the 16 most actively traded currencies this week, and the yen rose against the dollar, pound and currencies in Brazil, New Zealand and Australia on speculation the upheaval in Pakistan will lead to a reduction of carry trades funded in Switzerland and Japan.

In a carry trade, investors borrow in countries with low interest rates and convert the proceeds into currencies they can lend out for a higher return. They earn the spread between the borrowing and lending rates, incurring the risk that currency fluctuations may erase their profits.

Japan's benchmark lending rate is 0.5 percent and Switzerland's is 2.75 percent, the lowest among major economies.

``The Swiss franc is traditionally considered a safe-haven currency, and geopolitical risks pushed people to cut carry trades,'' said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co.

For the year, the dollar has declined against 14 of the 16 most actively traded currencies as the Fed cut the target rate for overnight lending between banks three times to 4.25 percent.

Payroll Report

A Labor Department report on Jan. 4 will show U.S. employers added 70,000 jobs this month, down from 94,000 in November, according to the median forecast of 58 economists surveyed by Bloomberg News. The unemployment rate is expected to rise to 4.8 percent in December from 4.7 percent.

Interest-rate futures on the Chicago Board of Trade yesterday indicated 94 percent odds that the Fed will reduce its benchmark interest rate a quarter-percentage point at its Jan. 30 meeting, compared with a 76 percent chance a day earlier and 80 percent a week ago.

``In the near term, the dollar probably remains on the weak side,'' said Doug Smith, chief Americas economist in New York at Standard Chartered Bank.

The dollar's share of global foreign-exchange reserves fell to 63.8 percent last quarter, the lowest level since records began in 1999, as international demand for U.S. assets slumped after the subprime-mortgage market collapsed, the International Monetary Fund said yesterday in Washington.

The U.S. currency will rebound to $1.39 per euro by the end of 2008, according to the median forecast of 42 economists surveyed by Bloomberg News. The yen will trade at 110 per dollar, according to the survey.

Treasuries Gain for a Second Week on Signs Economy Is Slowing

reasuries rose for a second week and headed for the best annual returns since 2002 after government reports showed sales of new homes in the U.S. fell to a 12-year low last month and more people were out of work.

Treasuries have returned 8.1 percent this year as traders anticipate the Federal Reserve will extend interest-rate cuts next month. A report next week is forecast to show the unemployment rate in the U.S. touched the highest in 17 months.

``People are leaning toward a little more weakness in the job report, which will keep a solid bid in Treasuries until that notion is disproven,'' said William O'Donnell, head of U.S. government bond strategy in Stamford, Connecticut, at UBS Securities LLC, one of the 20 primary securities dealers that trade with the Fed.

The yield on the benchmark 10-year note decreased 9 basis points this week to 4.08 percent, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/4 percent security due in November 2017 rose 3/4, or $7.50 per $1,000 face amount, to 101 3/8. Two-year yields also declined 9 basis points this week to 3.10 percent.

The median estimate of 58 economists surveyed by Bloomberg News is that the economy added 70,000 jobs in December, the fewest since September. The unemployment rate may rise to 4.8 percent, which would be the highest since July 2006. The Labor Department reports the statistics on Jan. 4.

`Wrong Place'

Fed funds futures contracts on the Chicago Board of Trade indicate a 90 percent chance the Fed will reduce its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting, up from 80 percent odds on Dec. 21.

``The fed funds rate is in the wrong place,'' Paul McCulley, a money manager at Pacific Investment Management Co. in Newport Beach, California, said in an interview on Bloomberg Television yesterday. ``Recessions are always about tipping points. That's what I worry about.''

McCulley said in a note on Dec. 27 the Fed will cut rates at each upcoming meeting to at least 3 percent.

Sales of new homes fell 9 percent to an annual pace of 647,000, and October sales were revised down to a 711,000 rate, the Commerce Department in Washington said yesterday. The median forecast of economists surveyed by Bloomberg was for a 1.6 percent decline.

`A Potential Recession'

``The argument for a potential recession has been fortified,'' said Andrew Harding, chief investment officer for fixed income in Cleveland at Allegiant Asset Management, which manages $18 billion. ``We'll see low rates for some period of time.''

Treasuries also gained on Dec. 27 after government reports showed a weaker-than-forecast gain in durable goods orders and jobless claims reached a two-year high. Riots in Pakistan after the assassination of former Prime Minister Benazir Bhutto added to investors' desire for the safety of government debt.

``Global uncertainty and unrest are usually good for Treasuries,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time on Dec. 31 and stay shut on Jan. 1 in Japan, the U.K. and the U.S. for New Year's Day.

Returns this year were the best since gaining 11.6 percent in 2002, according to indexes complied by Merrill Lynch & Co.

Libor Rate

Market rates for inter-bank loans have declined since the Fed, European Central Bank and three other central banks announced a combined effort on Dec. 12 to revive that market. The rates remain above the levels of July, before the collapse of the U.S. subprime-mortgage market caused banks to stop lending to all but the safest borrowers.

The rate banks charge to lend each other dollars fell, indicating they are less concerned about having funding at year- end. The three-month London interbank offered rate, or Libor, fell 13 basis points this week to a 22-month low of 4.73 percent, the British Bankers' Association said yesterday.

The gap between the Libor and overnight index swap rate, viewed as an indirect measure of the availability of funds in the money market, fell to 66 basis points yesterday, from as much as 106 basis points on Dec. 4, which was the widest since at least December 2001, as far back as Bloomberg compiles the data.

The gap averaged 11 basis points between 2001 and when credit market concern began mounting in August.

``Banks typically want to keep cash to themselves,'' Ajay Rajadhyaksha, head of fixed-income strategy in New York at primary dealer Barclays Capital Inc., said in an interview on Bloomberg Television. ``It's the fear of what may happen.''

The ``TED'' spread, the difference between what banks and the U.S. government pay for three-month loans, narrowed to 1.58 percentage points yesterday from 1.89 percentage points on Dec. 21.

U.S. Economy: New-Home Sales Tumble to 12-Year Low

Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

``This gives a dire picture,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York. ``The weak data raise the risk of the economy slowing faster than Fed officials would like.''

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

``The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP,'' said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

Treasuries rose. The yield on the benchmark 10-year note fell 12 basis points to 4.08 percent at 4:18 p.m. in New York. The dollar weakened against the euro and stocks ended the day little changed. Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.5 percent to 307.2.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

Inventories Swell

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

`Difficult Year'

Hovnanian plans to ``pare down our inventories in virtually all our markets,'' Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. ``It will be a difficult year.''

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

``The probability of recession is 50 percent for next year at some point,'' Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. ``We could see a downturn starting sometime in the spring or the second quarter of next year.''

Bank of England Cuts Rates, Says Inflation Will Slow

The Bank of England cut its benchmark interest rate for the first time in two years, saying inflation is likely to slow as higher credit costs hurt economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate by a quarter-point to 5.5 percent. Economists were the most split about today's decision in three years, with 28 of the 62 economists surveyed by Bloomberg News forecasting the central bank would lower rates.

``Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead,'' the bank said in a statement accompanying its decision in London today.

The slowest services growth in four years and surging money market rates led Bank of England policy makers to set aside concerns about faster inflation expressed just last week by King. With consumer confidence at its lowest since 2004, banks including Morgan Stanley say house prices may decline next year.

``This is likely to be the first of several rate cuts,'' said James Knightley, an economist at ING Financial Markets, who changed his forecast yesterday and predicted a reduction.

Market Reaction

The pound fell to near a 2 1/2-month low against the dollar after the decision. It touched $2.0277 by 1:35 p.m. in London, compared with $2.0266 yesterday. The U.K. currency also traded at 71.91 pence per euro, from 72.11 pence yesterday, when it was the least since May 2003. Bonds fell, pushing up the yield on two- year gilts by 5 basis points to 4.511 percent.

Royal Bank of Scotland Plc lowered its forecast for rates in the U.K., predicting the bank rate will touch 5 percent by May.

``We continue to expect sizeable easing in the year ahead,'' said Michael Saunders, an economist at Citigroup Inc. ``Our base case is for rates to fall by a further 50 basis points. But the outlook is exceptionally fluid, and risks are on the side of greater easing over time.''

The U.K.'s benchmark is still the highest among the Group of Seven industrialized nations. The European Central Bank kept its key rate at 4 percent in Frankfurt today. The U.S. Federal Reserve twice has trimmed its key rate, now at 4.5 percent.

King's Signal

King signaled the bank was planning rate reductions last month when he forecast the economy would slow ``sharply'' in 2008 after expanding more than 3 percent this year.

``Although upside risks to inflation remain, which the committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term,'' the bank said in its statement.

Slower growth adds to the woes faced by Prime Minister Gordon Brown as he attempts to revive the Labour government's popularity, which touched a 19-year low last month, according to pollster ComRes.

Opposition lawmakers have criticized Brown, who served as finance minister for a decade before taking over from Tony Blair in June, for encouraging consumers to rack up a record debt burden, which fueled a tripling of house prices since 1997. Brown signaled his backing for the bank's decision.

``As chancellor and as prime minister, he is always being prepared to back whatever decisions the MPC thinks it is appropriate to make but those are decisions for them,'' Brown's spokesman, Michael Ellam, said at his daily briefing shortly before the decision was announced.

Impact on Homeowners

For homeowners, each quarter-point cut in the central bank's benchmark rate shaves about 2.4 percent off monthly repayments on a standard mortgage of 200,000 pounds ($405,000), according to the Council of Mortgage Lenders. The payment would drop by 30.84 pounds per month to 1,275 pounds.

``A reduction in interest rates is exactly what the market needs and will benefit consumers,'' CML Director General Michael Coogan said. ``This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year.''

The impact of the subprime collapse, which caused lending between banks to seize up, is intensifying as institutions hoard cash to ensure they meet end-of-year funding requirements. The three-month Libor rate, a measure of borrowing costs for banks, was 6.64 percent today, near the highest since Sept. 18.

Auction Today

The Bank of England loaned 10 billion pounds for five weeks as it provided commercial banks with extra cash to help fund them until January. It allocated 16.1 percent of the total 62.2 billion pounds in bids after the rate decision. It also loaned 8.7 billion pounds in a one-week money-market auction.

``The credit squeeze has intensified,'' said Philip Shaw, an economist at Investec Securities in London, before today's rate decision. ``It's going to take longer for the money markets to return to normal than people thought a month ago.''

Higher money market rates sparked a run on Northern Rock Plc in September, the first on a U.K. bank in more than a century. The Financial Services Authority, the regulator overseeing the possible sale of the mortgage lender, said on Dec. 5 that mortgage lenders should brace for tighter credit conditions.

While two policy makers voted for a cut last month, King, Rachel Lomax, Charles Bean and Andrew Sentance expressed concern about inflation in the past month after crude oil reached a record $99.29 on Nov. 21 and food prices rose.

Inflation Concern

Consumers anticipate the inflation rate to rise to 2.8 percent, a survey by YouGov Plc showed last month, the most since the poll was first conducted two years ago. The Bank of England's inflation target is 2 percent.

``No doubt there will be some ritual bleating about the MPC cutting rates at a time when inflation is above target and set to rise further, but monetary policy is supposed to be pre- emptive,'' said Ian Kernohan, an economist at Royal London Asset Management. ``There is more than enough tightening already in the system to bring inflation down later next year.''

Barclays Capital and nine other banks and research groups changed their forecasts yesterday to predict a rate cut after evidence that higher lending rates are starting to affect the wider economy.

Service industries from banks to airlines grew at the slowest pace since May 2003, according to a survey of purchasing managers by the Chartered Institute of Purchasing and Supply. The figures cover two-fifths of the economy.

Mortgage rates are also rising even though the bank's benchmark rate has been unchanged for the past five months. HBOS Plc said house prices fell for a third month in November, the worst streak for property values since 1995, suggesting the decade-long housing boom is coming to an end.

``This cut should make it cheaper for people taking out a new mortgage or coming off existing fixed rate terms, and provide some support to the housing market,'' said Adrian Coles, director of the Building Societies Association. ``Activity in the housing market was already beginning to slow as a result of the previous increases in interest rates, and this is likely to continue.''

U.S. Productivity Increases More Than Forecast (Update3)

Worker productivity in the U.S. accelerated more than forecast in the third quarter, causing labor costs to drop by the most in four years.

Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, the most since 2003 and up from a 2.2 percent pace in the second quarter, the Labor Department said today in Washington. Labor expenses dropped at a 2 percent pace, also the most since 2003.

Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation. Lower labor costs will give Federal Reserve policy makers leeway to reduce interest rates to prevent the economy from slipping into a slowdown that will erode productivity.

``No question that the third quarter went out with a big roar in terms of both growth and productivity,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who correctly forecast the gain. ``Inflation is a diminished threat.''

A separate report from ADP Employer Services said companies added 189,000 jobs in November, more than triple the amount economists had anticipated. The figures pushed Treasury notes lower, while the dollar extended its advance.

Economists forecast productivity would accelerate to a 5.9 percent pace, according to the median of 68 projections in a Bloomberg News survey. Projections ranged from increases of 4.9 percent to 6.3 percent. A preliminary estimate last month showed productivity grew at a 4.9 percent rate.

Price of Labor

Unit labor costs were expected to drop at a 1.2 percent rate, according to the Bloomberg News survey. Projections for unit labor costs ranged from declines of 0.2 percent to 2.4 percent.

Compensation for each hour worked increased at an annual rate of 4.2 percent in the third quarter, compared with a 1 percent rate in the prior three months.

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, climbed at a 4.2 percent rate in the third quarter, compared with 2.1 percent the previous three months.

Among manufacturers, productivity increased at a 5 percent pace in the last quarter, compared with a gain of 2.4 percent.

The third-quarter increase in productivity reflected the pickup in economic growth. The economy expanded at a 4.9 percent rate last quarter, the most in four years, according to a Commerce Department report last week.

That pace will not be sustained in the current quarter as consumer spending slows, most economists say. Peter Kretzmer, senior economist at Bank of America Corp., is forecasting growth of 0.1 percent in the fourth quarter. That is also likely to pull productivity down.

Rate Cut

Weaker growth and slowing inflation give the Fed room to keep lowering rates. Market futures signal the Fed will cut its benchmark lending rate at its Dec. 11 meeting, its third consecutive decline since September.

Fed Chairman Ben S. Bernanke last week signaled ``renewed turbulence'' in markets may have shifted risks between growth and inflation, cementing speculation the central bank will cut interest rates.

``Uncertainty surrounding the outlook'' is ``even greater than usual,'' requiring the Fed to be ``exceptionally alert and flexible,'' Bernanke said last week.

The Fed on Nov. 20 lowered forecasts for growth next year, in part reflecting the deepening recession in the housing market. Policy makers now expect U.S. gross domestic product to increase between 1.8 percent and 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

Rebound in Efficiency

Today's report may ease concern that the productivity surge that began in 1996 was waning. Efficiency gains have slowed every year since reaching a peak of 4.1 percent in 2002. Last year, productivity rose just 1 percent, the smallest increase since 1995.

Over the past 12 months, productivity increased 2.7 percent, the most since the second quarter of 2004. Unit labor costs increased 3 percent compared with the third quarter of last year, down from a 4.2 percent year-over-year gain in the previous quarter.

In the late 1990s, Greenspan was one of the first to recognize that productivity was accelerating, and that the improvement could help contain inflation even as the economy strengthened and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

Job Losses

Some companies including Citigroup Inc. are cutting staff or slowing the pace of hiring to boost productivity. The Labor Department may report Dec. 7 that 70,000 new jobs were created in November, down from 166,000 in October, according to a Bloomberg survey.

Citigroup, the largest U.S. bank, is reviewing ways to cut costs as it grapples with mortgage writedowns that may lead to the first quarterly loss since at least 1998, spokeswoman Christina Pretto said Nov. 26.

Executives at the bank ``are planning ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities,'' said Pretto.

U.S. ISM Services Index Declined More Than Forecast (Update2)

U.S. service industries expanded in November at a slower pace as an index of new orders dropped, raising the risk the deepening housing recession will stall the economy.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell more than forecast to 54.1, the lowest level since March, from 55.8 the prior month, the Tempe, Arizona-based ISM said. Readings above 50 signal growth.

Declining home construction and defaults on subprime mortgages are taking a toll on retailers, wholesalers and financial firms. The Federal Reserve will cut interest rates again at a policy meeting next week to avert a broader decline, trading in federal funds futures suggests.

``This reflects slowing demand for services,'' said David Sloan, senior economist at 4Cast Inc. in New York, who had forecast a decline in the main index. The drop in the new orders index ``suggests there's a more significant slowing in activity and employment coming down the pipeline, even though it's holding up now.''

The index was projected to slip to 55, the median forecast in a Bloomberg News survey of 71 economists. Estimates ranged from 51.5 to 56.4. The index has averaged 57.7 since its inception in July 1997.

Payroll Report

Earlier today, a private report based on payroll data showed companies in the U.S. added 189,000 jobs in November, more than economists had forecast. The increase followed a revised estimate of 119,000 new jobs in October, more than previously calculated, ADP Employer Services said today.

Worker productivity in the U.S. accelerated in the third quarter, causing labor costs to drop, the Labor Department reported. Productivity rose at an annual rate of 6.3 percent, the most since 2003, while labor costs declined at a 2 percent pace. Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation.

The institute's index of new orders for non-manufacturing industries fell to 51.1, the lowest since April 2003, from 55.7 the prior month.

An index of employment dropped to 50.8 from 51.8, and a gauge of inventories rose to 50.5 from 49.5. An index of backlogs increased to 48.5 from 43.5 the prior month, today's figures showed.

Costs Jump

A measure of prices paid jumped to 76.5, the highest since September 2005, from 63.5.

The economy also is getting less help from manufacturing, which grew in November at the slowest pace in 10 months, according to a Dec. 3 report from the supply-management group.

Economists and the Fed have scaled back growth forecasts as banks shrink lending and the housing slump lingers. San Francisco Fed President Janet Yellen this week said financial conditions and consumer spending have deteriorated more than she expected in the past month, signaling she supports cutting interest rates next week.

The economy faces a risk ``that the problems in the housing market could spill over to personal consumption expenditures in a bigger way than has thus far been evident,'' Yellen said in a speech in Seattle on Dec. 3.

Consumer Spending

Consumers, whose spending accounts for more than two-thirds of the economy, are becoming more frugal in the face of falling home values, rising gasoline bills, and dimmer prospects for jobs and earnings growth. Commerce Department figures showed that consumer spending and incomes rose less than economists forecast in October.

Sears Holdings Corp., the biggest U.S. department-store chain, said last week it doesn't expect ``any significant near- term improvement'' in the retail business, while American Woodmark Corp., the supplier of kitchen and bath cabinets to home centers and builders, cut its 2008 profit and sales forecast.

``The continuing impact of tighter credit conditions and falling real-estate prices will cause the remodeling and new- construction markets to remain subdued,'' American Woodmark said in a statement last week.

Rising fuel costs and weak freight demand also led FedEx Corp., the second-largest U.S. package shipping company, to cut its fiscal 2008 profit forecast in November for a second time.

Not all service providers are hurting. Burger King Holdings Inc., the second-largest U.S. hamburger chain, said in November that first-quarter profit rose more than analysts estimated, helped by extended hours and new menu items.

Fed May Couple Cut With Measures to Increase Credit (Update1)

Federal Reserve officials, who are forecast to lower their main interest rate next week, are signaling that they are looking for additional ways to increase credit to companies and consumers.

The Fed may lower the discount rate -- what it charges banks for short-term direct loans -- by a quarter-point more than the benchmark rate after Vice Chairman Donald Kohn and San Francisco Fed President Janet Yellen publicly expressed frustration that previous rate cuts haven't encouraged banks to lend to one another.

Such a move would narrow the gap between the two rates -- normally 1 percentage point -- to a quarter-point. Economists said that may spur lending by easing the stigma of borrowing at the discount rate, letting firms claim they are taking advantage of a better deal.

``The Fed has to re-liquefy the markets to reduce the risk of a financial accident,'' said Lou Crandall, who used to work at the New York Fed and is now chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that focuses on government debt.

Policy makers are struggling to contain a crisis of confidence among banks that sent the cost of three-month loans between lenders to the highest in seven years. Failure to head off a credit crunch may send the economy into its first recession since 2001, economists said.

Crandall predicted the Fed will lower the discount rate by half a point, to 4.5 percent, and the main federal funds rate target by a quarter-point to 4.25 percent when it meets Dec. 11.

Futures prices indicate a 64 percent chance of a quarter- point move in the federal funds rate next week and a 36 percent chance of a half-point reduction. That compares with about a 50- 50 probability yesterday, before today's ADP Employer Services report showed companies added more than triple the number of jobs economists had forecast for November.

`Frustrated' Fed

``The Fed is frustrated they can't get anyone to come to the discount window,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc., and a former head of domestic economic research at the New York Fed. ``If the Fed lowers the discount rate closer to the funds rate, banks can represent their decision as merely borrowing at the best place to get money, rather than an act of desperation.''

The Fed has other options to ease the funding crunch besides reducing the penalty for discount-window borrowing.

One possibility is tripling the length of discount-window financing to 90 days from 30, said Stephen Cecchetti, a former research director at the New York Fed. The central bank, in its Aug. 17 decision to lower the discount rate a half-point to 5.75 percent, also extended the terms to allow 30-day financing instead of just overnight loans.

``Lengthening the term of the lending would really be more important,'' said Cecchetti, now a professor at Brandeis University in Waltham, Massachusetts.

Year-End Crush

Demand for cash typically rises at the end of the year as banks conserve funds to buttress balance sheets before closing their books. This year, that has combined with concerns about mounting losses on securities linked to mortgages at risk of default to cause borrowing costs to climb.

One gauge watched by the Fed shows rates at their highest relative to the Fed's benchmark since 2000.

The three-month dollar London Interbank Offered Rate, a benchmark for corporate borrowing, climbed to 65 basis points more than the Fed's target federal-funds rate yesterday. Excluding Sept. 18, when the Fed lowered its rate by half a point, that's the widest spread since May 2000, a period that includes the last U.S. recession in 2001.

Policy makers first addressed the August credit collapse by injecting funds into money markets, then lowering the discount rate. The Federal Open Market Committee followed up the next two months by cutting both rates by 0.75 percentage point.

Rate Gap

Officials sought to enhance the attractiveness of the discount window by reducing the gap with the federal funds rate and widening the collateral accepted for loans. While borrowing rose to $2.9 billion in the week ended Sept. 12, the highest since 2001, it has since fallen back, to $7 million last week.

The ``discount window has not been as used, or been as helpful at addressing liquidity issues, as I would have hoped,'' San Francisco Fed President Janet Yellen said Dec. 3 in Seattle. Along with other officials, she noted a ``stigma'' about banks tapping the loans.

Yellen, a former Fed governor and chairman of President Bill Clinton's Council of Economic Advisers, added that she's ``open to constructive suggestions'' on enhancing liquidity.

Kohn said in New York on Nov. 28 that the Fed needs ``to give some thought'' to how ``liquidity facilities can remain effective when financial markets are under stress.''

The Fed could draw on its 1999 template, when it addressed potential money shortages during the 2000 computer-system changeover, Cecchetti said. The Fed sold options on almost $500 billion of repurchase agreements for standby financing. None were exercised.

Also, officials at the Fed's Board of Governors and regional banks prepared a paper in 2000 identifying ``alternative instruments'' for policy. One possibility is to lend to ``strong financial institutions'' at a rate equal to the federal funds rate, the document says.

Unemployment May Rise, Manufacturing Slow: U.S. Economy Preview

Employers in the U.S. hired fewer workers in November and the unemployment rate rose to a 16-month high, reflecting a loss of confidence in the economic expansion, economists said before a report this week.

The economy created 75,000 jobs, less than half October's 166,000 gain, according to the median forecast in a Bloomberg News survey of economists before the Labor Department's Dec. 7 report. The jobless rate rose to 4.8 percent from 4.7 percent, based on the survey.

Companies are curbing expenses as the economy is forecast to nearly stall this quarter under the weight of the worsening housing slump. Federal Reserve Chairman Ben S. Bernanke last week said consumers face ``headwinds,'' and the labor market was ``important'' for sustaining growth.

``The labor market is adding to the list of reasons the consumer is in trouble,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``If employment growth is weakening, then so will spending.''

There is already evidence Americans are scaling back.

Consumer spending rose less than forecast in October and incomes increased at the slowest pace in six months, figures last week from the Commerce Department showed. Spending stalled when adjusted for inflation, the figure used in calculating economic growth.

Auto sales in November were probably the third weakest of the year, according to analysts surveyed by Bloomberg News. General Motors Corp., Ford Motor Co. and Chrysler LLC probably all posted declines compared with November 2006. Automakers will release November results tomorrow.

Manufacturing Slows

Also tomorrow, the Institute for Supply Management may report manufacturing expanded in November at the slowest pace in 10 months, adding to evidence the housing slump and rising energy costs are reverberating though the economy.

The Tempe, Arizona-based group's factory index probably fell to 50.7 from 50.9 in October, according to the survey median. A reading of 50 is the dividing line between expansion and contraction.

A report on Dec. 5 from the Commerce Department may show factory orders were unchanged in October after a 0.2 percent gain in September, the Bloomberg survey showed.

Service industries have so far fared better than manufacturers this quarter, economists said.

Services Little Changed

A separate report from the Institute for Supply Management due Dec. 5 may show banks, builders, retailers and other non- manufacturers expanded last month at about the same pace as in October. The gauge fell to 55 from 55.8, based on the median of economists' forecasts.

Energy prices, the weakening labor market and the persistent housing slump raise the odds that retailers and other service providers will soon feel the brunt of the economic slowdown, economists said.

Bear Stearns Cos., the biggest underwriter of U.S. mortgage bonds, said last week it will eliminate 650 jobs in the firm's fourth round of cuts this year.

Citigroup Inc., the largest U.S. bank, said it is reviewing ways to cut expenses as it seeks a new chief executive officer and grapples with mortgage writedowns. Former CEO Charles O. ``Chuck'' Prince III, who was forced to resign last month, had pledged to eliminate 17,000 jobs and trim costs by $4.6 billion.

Fed policy makers have signaled mounting concern over the outlook.

Consumer `Headwinds'

``The combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead,'' Bernanke said in a Nov. 29 speech.

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate this month, with a 40 percent probability of a half-point move. The Fed has cut rates by 0.75 percentage point over the past two meetings.

Policy makers said Nov. 20 that they expect U.S. gross domestic product to increase between 1.8 percent and 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

In other reports this week, a Labor Department report on Dec. 5 may show worker productivity in the third quarter rose, while labor costs fell. Two days later, a preliminary estimate from the University of Michigan may show consumer sentiment fell to a two-year low in December.

Economic Data Release Calendar 02-07 Dec

Here you can download Economic Data Release Calendar 02-07 Dec

Commodities 11/30/2007

Crude Oil Falls Below $90 on Concern Economic Growth Will Slow

Crude oil fell below $90 a barrel in the biggest weekly loss in two and a half years on concern slowing economic growth will cut energy demand, and as Saudi Oil Minister Ali al-Naimi said supplies in the market are ``ample.''

Consumer spending in the U.S., the world's biggest oil user, rose less than forecast in October and incomes increased at the slowest pace in six months, the Commerce Department said in Washington today. Al-Naimi, speaking in Doha, said oil prices don't reflect actual production and consumption trends.

``The market is simply becoming more concerned about a possible recession that could reduce petroleum demand,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``We have been seeing evidence for some time of a weakening economy and weakening oil demand.''

Crude oil for January delivery fell $2.30, or 2.5 percent, to settle at $88.71 a barrel at 2:45 p.m. on the New York Mercantile Exchange. Futures touched $88.45 a barrel, the lowest since Oct. 25. Oil has dropped 9.7 percent this week, the biggest weekly loss since April 2005. Prices climbed to a record $99.29 a barrel on Nov. 21.

Average U.S. consumption of oil products, such as gasoline and diesel, over the four weeks ended last week was 0.5 percent lower than a year ago, according to U.S. Energy Department data.

The U.S. dollar recorded its largest weekly gain against the euro since August, pressuring oil prices which rose earlier in the month on the currency's weakness. The dollar strengthened after Federal Reserve Chairman Ben S. Bernanke yesterday signaled he may lower interest rates to bolster growth. The yen had its biggest weekly drop in almost three years.

Oil surged above $95 a barrel yesterday after an Enbridge Inc. crude oil pipeline in Minnesota exploded on Nov. 28. Enbridge said operations will return to normal within three days.

Lower Prices

The pipeline blast seems to be ``just a near-term support,'' said Eric Wittenauer, an analyst at A.G. Edwards & Sons Inc. in St. Louis. ``As the details and extent of the damage and timeline for recovery came to light, it ended up pushing prices lower.''

The Enbridge pipeline blast killed two workers and cut shipments that average 1.5 million barrels a day. The pipelines transport oil to U.S. refiners, including BP Plc's plant in Whiting, Indiana, and facilities along the Gulf Coast. The U.S. imported 10.3 million barrels a day last week.

Brent crude oil for January settlement fell $1.96, or 2.2 percent, to $88.26 a barrel, the lowest since Oct. 30, on the ICE Futures Europe exchange in London.

Thirteen of 27 analysts surveyed by Bloomberg News, or 48 percent, said oil will drop through Dec. 7. Nine, or 33 percent, said prices will rise and five forecast little change. Last week, 43 percent of respondents said oil would fall.

January Options

Bets that January crude oil will fall below $85 a barrel were the most actively traded options contracts on the Nymex today. The put contracts, which represent the right to sell oil at that price, rose 55 cents to $1.13, or $1,130 per contract, according to data compiled by Bloomberg as of 4 p.m. New York time. One options contract is for 1,000 barrels of oil.

OPEC raised shipments 2 percent to 24.53 million barrels a day in the four weeks to Dec. 15, according to consulting company Oil Movements.

Saudi Arabia, OPEC's biggest producer, is adding 500,000 barrels of spare capacity in December to ensure that consumers are adequately supplied. The country is producing 9 million barrels a day, al-Naimi has said.

"They will probably give us a token production increase and, by that time, it will be well discounted,'' Ritterbusch said.