World Markets Lower Amid Further Signs of US Economic Weakness

By Michael Bowman

Washington
18 February 2009

World markets were mostly lower on Wednesday amid more dire U.S. economic news and a move by Germany to facilitate bank nationalization. The Dow Jones Industrial Average was up one-tenth of a percent, while other U.S. indexes were just slightly lower. The Tokyo exchange was nearly 1.5 percent lower, while the major European indexes lost less than one percent.

One day after President Barack Obama signed the biggest stimulus package in U.S. history, the scale of the challenges facing America's ailing economy came into sharper focus.

The Federal Reserve, the nation's central bank, now projects U.S. unemployment will rise as high as 8.8 percent this year, while the economy could contract by as much as 1.3 percent, extending a recession that began more than a year ago.

In addition, the Fed reports that U.S. industrial production fell for a third consecutive month in January, by 1.8 percent, a larger drop than most economists had anticipated. The central bank also revised downward the figure previously released for December 2008 was the worst year for American manufacturing in seven years.

Meanwhile, the U.S. Commerce Department reported that new home construction plummeted to an all-time low, down 17 percent in January from the previous month. Applications for building permits, an indicator of future construction activity, also fell.

President Obama says the housing slowdown is having a devastating effect on the economy as a whole. 

"Construction companies and home furnishing stores and painters and landscapers, they are all cutting back. The number of residential construction jobs has fallen by more than a quarter million since mid-2006. As businesses lose revenue and people lose income, the tax base shrinks, which means less money for schools and police and fire departments," he said.

Mr. Obama spoke in Arizona on Wednesday, where he unveiled a program to reduce home foreclosures.

But not all economists see the steep decline in home construction as a bad thing, given the severely depressed state of America's housing market.

Millions of home foreclosures combined with a continuing credit squeeze and a deteriorating economy have led to a glut of unsold houses on the market. Given massive inventory surpluses, the last thing the market needs is an infusion of newly-built dwellings, according to Diane Swonk, Chief Economist at Chicago-based Mesirow Financial. 

"The bad news is, it is very hard on builders who cannot get paid to build. The good news is that it is clearing the inventory of unsold homes. What we are doing is not adding insult to injury by putting more empty homes on the market," she said.

Economists have been debating the likely effectiveness of President Obama's initiatives to prop up the economy, aid homeowners and deal with the country's financial crisis.

More important than the details of any one provision of any one plan is whether, taken as a whole, the initiatives restore the nation's collective confidence, according to economist Mark Zandi of Moodys Economy.com.

"The key aspect of all of this, to get the economy on more stable ground, is to try to restore confidence because we have in many respects lost faith in our economy," he said.

Earlier Wednesday, Germany's government agreed on a new provision that will allow it to nationalize private banks that are at risk of failing. The measure is the latest in a series of steps taken by governments and central banks around the world to rescue their banking and financial sectors in the wake of a global credit crisis.