Finance news. My opinion.

The worst U.S. housing slump since the Great Depression is just starting to make its mark on inflation, indicating the Federal Reserve can maintain its monetary stimulus well into 2010, economists said.

The price of renting a house or apartment, which accounts for 30 percent of the cost of living, was unchanged last month, according to the Labor Department’s report on consumer prices issued today in Washington. One measure designed to track the value of owner-occupied houses rose the least over the past 12 months since records began in 1982.

The real-estate decline that started more than three years ago is likely to keep pushing up foreclosure and vacancy rates, which are already at record levels. The glut of properties will continue to pressure rents and limit inflation, giving Fed policy makers more time to remove the $1 trillion they’ve injected into the banking system.

“The Fed keeps the spigot wide open” at least through the middle of next year and maybe into 2011, said Donald Ratajczak, chief consulting economist at Morgan Keegan Inc. in Memphis, and a former director of the Economic Forecasting Center at Georgia State University, where he won acclaim for his inflation forecasts in the 1990s.

The cost of living was unchanged in July and dropped 2.1 percent from a year earlier, the biggest 12-month decrease since 1950, today’s Labor Department report showed. Excluding food and energy costs, the so-called core consumer-price index increased 1.5 percent from July 2008, the smallest gain since February 2004.

‘New Dimension’

“There is a risk that sometime in the next few months, you could see a negative print on core CPI,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and a former Fed economist.

“The debate on the Fed will take on a whole new dimension,” Feroli said. “Now people will say, even with growth, the Fed will be a little bit leery here of deflation risks and will want to keep accommodation longer than is priced in the market.” Deflation is a persistent drop in prices that hurts the economy by making debts harder to pay and eroding corporate profits payday loans.

Rents, which make up almost 40 percent of the core CPI, have played a leading role in that deceleration. A measure known as owners-equivalent rent, an imputed value for owner-occupied homes that accounts for almost the entire category, rose 1.7 percent in the 12 months that ended in July, the smallest gain since records began almost three decades ago.

Actual home and apartment rents, the smaller category, rose 0.4 percent during the last six months, the least since August 1963.

Record Vacancies

Indications are that the pressures will intensify in coming months. Rental vacancy rates climbed to 10.6 percent in the second quarter, the highest level since record-keeping began in 1956, according to figures from the Census Bureau.

A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac Inc. One in 355 households got a filing, the highest monthly rate in RealtyTrac figures dating to January 2005, the Irvine, California-based company said.

Fed policy makers who met in Washington this week said that excess capacity would probably keep inflation “subdued for some time.” Investors are betting central bankers will start raising rates in the first half of 2010, according to futures trading on the Chicago Board of Trade.

Not all economists are as sanguine as the central bakers about the outlook for prices.

“It might be time to start pushing the panic button on deflation risk were it not for signs that the U.S. economy has bottomed,” David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said today in a note to clients. “We expect core inflation to level off later this year,” he said, because reductions in spare capacity are more important in determining price trends than the amount of the excess.

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The U.S. Federal Reserve is “confident” of its ability to stem inflation after what’s likely to be an “extended period” for policies aimed at restarting lending, Chairman Ben S. Bernanke said.

“When the economic outlook requires us to do so,” the central bank will employ a series of tools to tighten policy, Bernanke said, writing in an opinion piece in the Wall Street Journal.

Bernanke outlined five ways the central bank will be able to prevent the record reserves that banks have accumulated from causing money supply and inflation to surge. Officials will use the interest rate on banks’ deposits with the Fed as a principal tool, which they can supplement with other means, including reverse-repurchase agreements and term deposits, he said.

The opinion piece, published late yesterday, before Bernanke’s semiannual monetary-policy testimony to Congress today, signals he’s seeking to reassure investors that the Fed will contain consumer prices when the economy recovers.

“Bernanke is preparing the market by communicating at an early stage,” said Seiji Shiraishi, chief economist for Japan at HSBC Securities Japan Ltd. in Tokyo. “Whether they can do that will depend on the strength of the cyclical recovery and the soundness of the banks.”

The 10-year note yield fell three basis points to 3.58 percent at 12:53 p.m. in Tokyo, according to data compiled by Bloomberg.

‘Top Priority’

The Fed said in minutes of last month’s policy meeting that making sure it has the ability to tighten credit at some point is a “top priority.” Officials discussed their options at the session, even as most policy makers judged the economy at risk to further shocks, the minutes showed last week.

“We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner,” Bernanke said in the opinion article.

Since March 2008, the Fed has taken steps to combat the credit crisis that included expanded emergency lending to banks, support for the commercial-paper market and a lifeline to insurer American International Group Inc. Total assets on the Fed’s balance sheet now stand at $2.07 trillion, up $1.16 trillion over the past year. The central bank has also cut the benchmark lending rate to a range of zero to 0.25 percent.

Need for Strategy

Without an exit strategy, the increase in bank reserves could cause inflation because banks would be able to lend on the money, potentially fueling a surge in money growth cheap car insurance. The Fed, then, must either shrink the amount of reserves or find a way to keep banks from lending them for bigger yields.

“We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability,” Bernanke said.

To keep interest rates low and credit flowing to housing markets, the Fed plans this year to buy as much as $1.75 trillion of mortgage-backed securities, housing-agency debt and Treasuries. The last exit option, “if necessary,” would be to sell some of the securities on the open market, Bernanke said.

In a term reverse-repurchase agreement, the central bank would enter into a longer-term contract to sell securities to primary dealers, in effect removing money from the banking system temporarily, and repurchase them at a later date.

Term Deposits

The Fed’s proposed term deposits would be similar to banks’ certificates of deposit for customers, and funds held at the Fed would not be available to lend in the overnight federal funds market, Bernanke said.

Another option would be for the Treasury to sell bills and deposit the funds with the Fed, Bernanke wrote.

“Although the Treasury’s operations are helpful, to protect the independence of monetary policy, we must take care to ensure that we can achieve our policy objectives without reliance on the Treasury,” the Fed chief said.

The Fed received legislative authority to begin paying interest on reserves in October as part of legislation creating the $700 billion financial-rescue fund.

Fed officials hoped that would help keep the benchmark interest rate stable while the central bank flooded the banking system with cash. The authority failed to keep the main federal- funds rate from declining almost to zero before the Fed officially lowered it that far. The Fed currently pays 0.25 percent on required and excess reserve balances.

Banks’ deposits with the Fed increased to $772 billion in June from $9.3 billion a year earlier.

Bernanke said the deposit rate will work better “under more normal financial conditions” and limit the gap between that and the federal funds rate. “If that gap persists,” the Fed will use the other tools, he said.

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The British economy will shrink 4.4 percent in 2009 before recovering in 2010, Ernst & Young’s Item Club will say tomorrow.

The forecast by the research group, which uses the same economic model as the U.K. Treasury, is worse than the 3.5 percent contraction predicted in April. Tomorrow it will also revise up the prediction for 2010 to show the economy expanding 0.5 percent instead of shrinking 0.1 percent.

U.K. gross domestic product plunged by the most in a half- century in the first quarter, prompting the central bank to cut interest rates to a record low and start buying assets with newly created money. Bank of England Deputy Governor Charles Bean said last week that the economy may return to quarterly growth by the end of this year payday loans in one hour.

“The economic patient has been in trauma, but thanks to the paramedics at the Treasury and the Bank of England, who pumped billions of pounds worth of medicine into the economy, the patient has been stabilized for now,” Item Club Chief Economic Adviser Peter Spencer will say in a statement. “But it remains unclear how quick and complete recovery will be and there is still a serious chance of a relapse.”

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New Zealand’s exports increased in May and home-building approvals rose for the third time in four months, adding to signs the economy may emerge from its deepest recession in more than three decades.

Exports climbed 5.8 percent from a year earlier, narrowing the annual trade deficit to the smallest in more than five years, Statistics New Zealand said in Wellington today. Home-building approvals advanced 3.5 percent from April, it reported.

A pickup in overseas shipments and an improvement in the housing market will help revive an economy that shrank 1 percent in the first quarter. Reserve Bank Governor Alan Bollard, who this month kept the benchmark interest rate at a record-low 2.5 percent, expects growth to return in the fourth quarter of 2009.

“The rate of contraction in the economy likely eased significantly in the second quarter,” said Darren Gibbs, chief economist at Deutsche Bank AG in Auckland. “While many nations have reported a huge decline in export receipts since late last year, the report highlights the relative resilience of New Zealand’s export sector.”

New Zealand posted a trade surplus of NZ$858 million ($552 million) in May, or more than three times the NZ$250 million expected by economists. The deficit in the year ended May narrowed to NZ$3.04 billion.

The NZX 50 stock index rose 0.5 percent to 2,784.58 as of 12:55 p.m. in Wellington. The New Zealand dollar traded at 64.47 U.S. cents from 64.54 cents before the figures were released. The five-year bond yield was unchanged at 4.87 percent.

Global Outlook

The outlook for New Zealand commodity exports is improving as the world’s largest economies emerge from recession. Japan’s industrial output jumped 5.9 percent in May, a pace that matched the steepest increase in 56 years, a report showed today.

The Organization for Economic Cooperation and Development last week raised its forecast for the economy of its 30 member nations for the first time in two years.

New Zealand fell into a recession in the first quarter last year. Finance Minister Bill English said last week he wants overseas shipments, which make up 30 percent of gross domestic product, to lead the recovery.

Exports rose to NZ$3.96 billion in May from a year earlier, led by a gain in sales of whole milk powder, logs, lumber and kiwifruit, the statistics bureau said free car insurance quotes. Commodity prices rose for a third month in May, according to an ANZ National Bank Ltd. index.

Still, the trade report also showed imports tumbled 21 percent from a year earlier to NZ$3.1 billion. The decline was the largest since February 1993 and was led by fewer imports of crude oil, gasoline and passenger cars.

Weak Economy

Demand for imports has tumbled as companies cut investment and as the highest unemployment rate in six years prompted consumers to reduce spending.

“The bulk of the turnaround in overseas trade is due to the import collapse” amid the weakness in domestic demand, said Annette Beacher, a senior strategist at TD Securities Ltd. in Singapore.

New Zealand’s monthly trade figures don’t adjust for prices. The value of oil imports fell 33 percent as prices slumped 30 percent, today’s report showed.

Business confidence slumped to an all-time low in the first quarter, according to a survey by the New Zealand Institute of Economic Research Inc. Investment intentions dropped to the lowest level on record, the Wellington-based institute said.

The jobless rate rose to 5 percent in the first quarter and may reach 8 percent by late 2010, curbing demand for imported computers and cars as consumers rein in purchases, according to the Treasury Department.

Rate Cuts

To revive demand, Bollard has cut the benchmark interest rate by 5.75 percentage points since July. Investment in housing contracted for a seventh straight quarter in the three months ended March 31, a government report showed last week.

House sales increased 44 percent in May from a year ago, according to Real Estate Institute figures published June 11.

While the number of home-building approvals climbed in May from January’s record low, it mainly has been boosted by apartments being built at retirement villages. Excluding apartments, approvals fell 3.1 percent from April and the underlying trend remains negative.

There were 275 apartment approvals in May, accounting for 22 percent of total approvals. Over the past year, apartments have averaged about 11 percent of the total.

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Asia can start discussions on a shared currency to avoid “intra-regional exchange rate complications,” Asian Development Bank President Haruhiko Kuroda said today.

“I hold the view that we can start discussions and seriously discuss this issue,” he said at a public lecture in Singapore. “Although it may take decades, eventually I think we may be able to establish a common currency.”

Asian governments have been debating the merits of a shared currency since the region’s economies were rocked by a financial crisis a decade ago. The 10-country Association of Southeast Asian Nations, or Asean, is proceeding with efforts to create an economic zone modeled after the European Union, without a common currency, by 2015.

“Creating a common currency does involve overcoming hurdles,” Kuroda said. These include the need to have a common market, some harmonization of macroeconomic policies, a regional central bank that would require regional countries give up their currencies and independent monetary policies, he said.

Asean members agreed with Japan, China and South Korea in May to start a $120 billion foreign-currency reserve pool by year-end, to be used in times of turmoil as the region sought ways to shield its economies from the worst global recession since the Great Depression.

The pool, an expansion of an existing framework of bilateral currency swaps, widens access to foreign-exchange reserves and will allow nations such as Indonesia and Thailand, recipients of International Monetary Fund bailouts a decade ago, to defend their currencies business cards for sale.

Chiang Mai Initiative

Kuroda said he was “quite confident” that talks on expanding the so-called Chiang Mai Initiative will be completed by the end of this year. Countries outside Asean and the three northern neighbors may participate in the initiative in the future, he said.

Asian countries must increase communication on their foreign exchange policies as currency volatility can affect regional financial systems, Kuroda said, without elaborating. Establishing a mechanism to monitor regional currency movements would benefit the region, he added.

Kuroda doesn’t expect central banks that are large holders of dollar-denominated assets to sell out of those holdings, he said. The central banks are “locked in” because they would incur large losses by selling the dollar assets, he said.

The dollar’s status as the world economy’s sole reserve currency has come into question as leaders of Brazil, Russia, India and China discuss substituting other assets for their dollar holdings amid a ballooning U.S. budget deficit. Russian President Dmitry Medvedev this month proposed that nations use a mix of regional reserve currencies to reduce reliance on the dollar.

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European Central Bank Vice President Lucas Papademos said the region’s credit squeeze persists as banks continue to shrink their balance sheets and demand for loans remains weak.

“The decline in demand for credit and deleveraging processes are limiting the expansion of credit by banks to the credit sector, although the ECB is providing financing to the banks to support themselves,” Papademos said today in an interview in Kyoto, Japan.

The Frankfurt-based ECB, which has cut its benchmark interest rate to a record low of 1 percent, has said it will loan banks as much money as they need for up to 12 months and pledged to buy 60 billion euros ($85 billion) of covered bonds in an effort to revive lending affordable health insurance.

“There is no danger of excessive credit” resulting from the ECB’s monetary easing, Papademos said. Lending is still contracting in some countries and expanding slowly in others, he said.

When asked whether the ECB would consider expanding its funding-support measures, Papademos said: “We are assessing the situation and one cannot say a priori whether we will do it or not.”

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Unemployment in the U.S. probably climbed in April to a 25-year high, showing the labor market will be one of the last areas to emerge from the worst recession in at least 50 years, economists said before reports this week.

The jobless rate jumped to 8.9 percent last month from 8.5 percent in March and employers cut at least 600,000 workers from payrolls for a fifth straight time, according to the median estimate in a Bloomberg News survey ahead of a May 8 Labor Department report. Other figures may show service industries shrank at a slower pace.

Companies may keep trimming staff and spending in a bid to shore up profits until sales show sustained gains, something economists say is unlikely to happen for months. Even when an economic rebound begins to take hold, the loss of jobs and smaller paychecks are likely to lead to a muted expansion.

“The recession will be officially over this year, but the recovery will be sluggish,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “Getting out of the jobs recession will take longer.”

An estimated 600,000 workers were cut from payrolls last month, according to the survey median, bringing total job losses since the recession began in December 2007 to 5.7 million, the most of any economic slump in the post-World War II era.

It’s “hard to fathom any sustained strength in consumer spending” until the “hefty” job losses ease, said BMO’s Gregory, who estimated the unemployment rate may rise to 9.5 percent by yearend and level off around 9.7 percent in 2010.

GDP Shrinks

Gross domestic product dropped at a 6.1 percent annual pace in the first three months of this year after contracting at a 6.3 percent rate in the last quarter of 2008, government figures showed last week. Consumer spending climbed, ending its biggest slide since 1980.

Still, economists surveyed by Bloomberg in early April projected spending, the biggest part of the economy, will falter again this quarter before showing more sustained gains in the second half of the year.

Automakers have been among the hardest hit industries as consumers boost savings and pay down debt. Vehicles sold at a 9.3 million annual pace in April, less than forecast and down from a 9.9 million pace a month earlier, industry figures showed last week.

A liquidation by Chrysler LLC, which the government pushed into bankruptcy on April 30, would result in the loss of 38,500 jobs should its proposed partnership with Italy’s Fiat SpA be rejected by the court, the company estimated online payday cash loan.

Fewer Dealers

General Motors Corp., surviving on U.S. loans, is working to beat a June 1 bankruptcy deadline set by the government. GM’s plan to trim its retail franchises may eliminate as many as 137,330 dealership jobs, the National Automobile Dealers Association estimated.

Economists project the Labor report may show manufacturers cut payrolls by 157,000 workers in April after a decline of 161,000 a month earlier.

One bright spot last month may have been government staffing for the 2010 census. The U.S. Census Bureau began hiring 140,000 temporary employees in April to start conducting the population count that happens once every 10 years. They are the first of more than 1.4 million people it will hire over the next year.

Another report may show service providers, which account for almost 90 percent of the economy, are starting to improve. The Institute for Supply Management’s index of non-manufacturing businesses probably climbed to 42 in April, according to the Bloomberg survey. Readings below 50 signal contraction. The Tempe, Arizona-based group will release the figures on May 5.

Casinos Hurting

The deteriorating labor market is one reason service industries are still shrinking, albeit at a slower pace. Las Vegas-based Wynn Resorts Ltd.’s revenue is down as business at casinos slows, Chief Executive Officer Steve Wynn said last week.

“People who have lost their jobs and whose businesses are in trouble don’t have money for leisure and optional expenses,” Wynn said in an April 28 speech in Beverly Hills, California.

The ISM’s gauge of manufacturing climbed to 40.1 in April, signaling the worst of the factory slump may be over, figures showed last week.

Employers are trying to get more out of the staff they have left to give profits an added lift. Labor Department figures on May 7 may show productivity grew at a 0.8 percent annual pace in the first quarter as companies slashed payrolls and hours even faster than output slumped, according to the Bloomberg survey.

Tomorrow, the National Association of Realtors may report the number of Americans who signed contracts to buy previously owned homes was probably unchanged in March as lower prices attracted buyers, according to the Bloomberg survey median.

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Japan may sell as much as 17 trillion yen ($171 billion) of additional bonds this fiscal year to help pay for Prime Minister Taro Aso’s third stimulus package and other projects, Finance Ministry officials said.

The government may issue between 16 trillion yen and 17 trillion yen of bonds on top of the planned 113.3 trillion yen of debt to be sold to investors in the year that started April 1, according to two officials who declined to be identified. The extra sale will include borrowing for the stimulus package as well as about 6 trillion yen of so-called zaito bonds to fund loans for state-owned financial institutions, they said.

Benchmark bond yields held near their highest level since November after Finance Minister Kaoru Yosano said last week that more than 10 trillion yen in debt may be sold to help fund Aso’s record 15.4 trillion yen economic package. Increasing Japan’s public debt, already the world’s largest, may put more pressure on the central bank to step up its purchases of government debt from commercial lenders, analysts say.

“It will be tough for investors alone to absorb such a huge amount of additional bonds,” said Susumu Kato, chief economist at Calyon Securities in Tokyo. “The Bank of Japan may face more and more political pressure to increase its bond purchases to provide fiscal support to the government.”

The yield on the 10-year bond rose three basis points to 1.46 percent at 1:29 p.m. in Tokyo, approaching the five-month high of 1.49 percent reached April 10.

Pressure From Lawmakers

Nobutaka Machimura, who heads the ruling Liberal Democratic Party’s economic recovery panel, said yesterday that he plans to meet with Bank of Japan Governor Masaaki Shirakawa and urge him to boost measures to help companies get financing cash loans.

The central bank expanded its monthly government bond purchases from lenders to 1.8 trillion yen from 1.4 trillion yen in March. Machimura said his panel hadn’t discussed whether it would ask the bank to increase the purchases further.

BOJ board members said that the bank would reach its self- imposed limit for the purchases in several years if they continued at the current pace, according to minutes of their March meeting. The central bank has a rule of preventing its sovereign bond holdings from exceeding the amount of bank notes circulating in the economy.

Calyon’s Kato said the bank may increase its purchases by 200 billion yen to 2 trillion yen in about six months.

Declining Tax Revenue

The ministry plans to meet primary dealers, who must bid at government auctions, to discuss bond issuance tomorrow. It also will hold a meeting with investors next week. The government is expected to submit its extra budget proposal to fund the stimulus to parliament around April 27.

The government may need to sell more bonds and compile a second supplementary budget later in the year to help pay for a shortfall in tax revenue.

Tax receipts may fall about 4 trillion yen short of this fiscal year’s projection of 46.1 trillion yen as the recession saps corporate tax revenue, two ministry officials said.

“In the long run, people are surely concerned about loosening fiscal discipline and slumping tax revenue,” said Naomi Hasegawa, a senior bond strategist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest lender by assets. “That may eventually prompt them to demand higher yields.”

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Ameren’s 840,000 natural gas customers in Illinois will see heating prices decline further next month because of a continued weakening in energy demand.

Retail prices for natural gas, which makes up about two-thirds of customers’ bills, will go down 17 percent or 19 percent depending on the utility, St. Louis-based Ameren said. The price for Cilco and CIPS customers will drop to 64 cents a therm from 77 cents. AmerenIP prices will fall to 68 cents from 84 cents.

Natural gas demand has eroded, especially among industrial customers, as the recession lingers. Retail gas prices charged by Ameren’s Illinois utilities have fallen as much as 55 percent since their peak last fall personal loans for people with bad credit.

"We also recognize that the extremely cold temperatures that occurred in December and January meant that our customers used more natural gas this year than a year ago," said Scott Glaeser, Ameren’s vice president of gas supply.

Ameren utilities buy gas from producers across the country. Retail prices are adjusted monthly depending on changes in the wholesale market.

jtomich@post-dispatch.com | 314-340-8320

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Poor loan-to-value ratios are spreading. The volume of property owners with debt that exceeds value is high, according to the latest Business Pulse survey, the nonscientific weekly online poll from the Tampa Bay Business Journal .

Of the 379 respondents to a question about whether property owners are ‘underwater’ on their home debt, 46 percent, or 173 said they were, and 22, or 5 percent said they were flat. Just under half, 49 percent or 184 respondents, said they didn’t owe more than their property was worth.

Of those that are underwater, a 37 percent majority said they owe between $50,001 and $75,000 while 26 percent owed between $1,000 and $25,000. One-fifth of the respondents owe $100,000 or more.

Of those who still have equity, 39 percent said it is shrinking fast while 61 percent said it is stable or growing.

In comments from readers, one said his underwater condition has worsened over the last two months by 500 percent.

“I have offset this somewhat by having a home inspection aimed at gaining credit for wind mitigation features present in my home,” said reader Michael Manning. “It reduced my insurance premium by 33 percent,” he said.

For reader Tom Kay, he has acquaintances that are almost desperate to sell their homes because they simply don’t want to pay significantly increased property taxes and insurance premiums following their purchases made between 2004 and 2006, which have not significantly declined despite the decline in underlying value no fax needed payday loans.

“In my case, I bought a house previously homesteaded, and following my purchase with a ‘new’ homestead, the property tax tripled and the insurance cost more than doubled,” Kay said. “They haven’t lowered the assessment or the insurance premium yet to reflect the real-world diminished value of the property.”

Reader Maximillian Boehmer said he works in lending and has people calling every day believing their house is the only one in town that hasn’t decreased in value.

“You cannot escape this economic crisis through denial,” he said. “We are all in this together, and hope as you may, you are not immune. You may have equity in your home, but trust me the house isn’t worth what it used to be.”

Tampa area home prices were down 20.9 percent for 2008 and 32.4 percent since the July 2006 peak, according to numbers released late last month in the S&P/Case-Shiller home price index.

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