Published September 5, 2007
Stocks fell yesterday as investors were thrown by reports that showed the troubles in the housing market were deepening even as a Federal Reserve survey of regional conditions found little evidence of the turmoil having damaged other parts of the economy.
The sell-off briefly intensified after the release of the Fed's Beige Book, which summarizes anecdotal reports about the economy from business executives across the country, led some investors to conclude that Fed policymakers would be less inclined to cut interest rates after their meeting on Sept. 18, given the relatively benign report.
When Fed officials next meet, they are widely expected to reduce the key lending rate from 5.25 percent to 5 percent or perhaps even less, but analysts are divided over how aggressively the Fed might pursue further rate cuts later this year.
The Standard & Poor's 500-stock index closed down 1.2 percent, or 17.13 points, to 1,472.29; it had fallen by as much as 1.5 percent after the Beige Book was released in the early afternoon. The Dow Jones industrial average closed down 143.39 points, or 1.1 percent, to 13,305.47.
Treasury prices jumped, as investors sought safety in debt backed by the federal government. The yield on the 10-year Treasury note, which moves in the opposite direction from the price, fell to 4.47 percent, from 4.55 percent on Tuesday, hitting its lowest level since early December.
Early yesterday, an index that tracks signing of contracts for existing home sales tumbled 12.2 percent for July, to its lowest level in more than six years, the National Association of Realtors reported. The trade group said its members were reporting that buyers of homes were having a tougher time obtaining financing.
Pending home sales dropped by nearly 21 percent in the West, which has been hit hard by a spike in interest rates on jumbo mortgages - those for amounts higher than $417,000.
"The fact is that housing troubles are still building," said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. "To say that we have bottomed is very much premature. The effect on economic activity will grow in the second half of the year and into 2008."
The Fed report released yesterday said that the credit crunch had made it more difficult for people to obtain mortgages and that "the weakness in the housing market deepened" in most of the Federal Reserve districts. But it also said that credit remained readily available for most consumer and business borrowers and that, outside of real estate, the convulsions in financial markets had had "limited" effects on economic activity.
In a speech Friday at the Fed's annual symposium in Wyoming, the chairman, Ben S. Bernanke, said the central bank would place more weight than usual on anecdotal reports because the incoming statistical data might not be timely enough to measure a broad economic impact of the credit crisis that began with failing subprime loans.
But Fed officials made it clear last week that they were very worried about the housing market, where the news was gloomy, and the readings from other areas were mixed rather than buoyant.
"They are going to take the Beige Book statement that it's limited only to the housing area with a grain of salt," said Joshua Shapiro, chief economist at MFR Inc., a research firm in New York. "There is only one wound on the body, but how big is the wound and what impact does it have on the rest of the body?"
Shapiro's firm is expecting the Fed to cut its benchmark interest rate, now at 5.25 percent, by 0.25 percentage point later this month and by a total of 0.75 percentage point by the end of the year. That forecast is in line with trading in the futures market.
There have been only a few signs that the housing market's problems are spilling into the economy as a whole.
The Beige Book reported that retail sales were "modest to moderate" in most of the country, but inventory was "at or above desired levels" in districts that mentioned it. "Several retailers reported that they planned to or had already heavily discounted merchandise to move inventory," the report said.
A key reading on the economy that is likely to play a big role in the Fed's decision on interest rates will come tomorrow when the Labor Department releases employment figures for August. Yesterday, a privately compiled payroll report from Automatic Data Processing showed that corporate payrolls grew by just 38,000 in August, down from 41,000 in July and 143,000 in June.
Many forecasters believe the economy will be able to weather a surge in mortgage defaults and falling home prices if jobs remain plentiful and wages continue rising. Experts acknowledge, however, that employment is a lagging indicator of the economy's health and that many corporate sectors would be hurt if consumer spending deteriorated significantly.
"The job market has been a stalwart of strength," said Stern of Bessemer Trust, who does not expect a recession. "We are dependent on companies continuing to create jobs."
Among the S&P 500, 422 stocks fell, 76 rose and two were unchanged; all but three of the 30 Dow companies fell. Financial stocks accounted for more than a third of the losses in the S&P 500. Information technology, industrial and consumer discretionary stocks accounted for a third of the decline.
Citigroup and Bank of America led the financial sector down as concerns mounted about big institutions' involvement in off-balance sheet borrowing in the short-term debt markets and investing in assets like mortgage bonds. A Securities and Exchange Commission official testifying before Congress said the commission was looking into such structured investment vehicles, which have had a increasingly hard time borrowing money by selling commercial paper, a type of short-term debt.
Technology shares were led down by Apple, which cut the price of its new iPhone by $200 and stopped selling a lower-end version of the device just two months after introducing it. Shares of Apple fell 5.2 percent and shares of AT&T, the service provider for the phone, lost 1.4 percent.
More broadly, the Beige Book noted that manufacturing activity expanded, except in the automobile and building material industries. But demand for business loans was either steady or declining in the New York, Cleveland, Chicago and St. Louis districts.
Given the turmoil and volatility in the financial markets in the last month and a half, some market specialists believe the Fed may be forced to be freer with a rate cut than it normally would be.
"It would be psychological," said Bruce Bittles, chief market strategist at Robert W. Baird & Co. "It would leave room for further rate cuts if needed. There is no guarantee that lower rates will help this housing situation. The important thing is that it stabilizes other areas like the stock market."