Inflation rate is worst in 17 years

WASHINGTON - Higher costs for energy and food last year pushed the inflation rate up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas. Meanwhile, industrial output was flat in December, more evidence of a significant slowdown in the economy.

Consumer prices rose by 4.1 percent for all of 2007, up sharply from a 2.5 percent increase in 2006, the Labor Department said Wednesday. Consumers felt the pain when they filled up their gas tanks or shopped for groceries. Prices for both energy and food shot up by the largest amount since 1990.

In a second report, the Federal Reserve said that output at the nation's factories, mines and utilities showed no growth in December, adding to a string of weak economic reports showing that the economy was slowing at the end of last year.

The unchanged output in December was the poorest showing since industrial output actually fell by 0.5 percent in October. Output had been up by 0.3 percent in November.

The December weakness reflected flat output at U.S. factories, a tiny 0.1 percent rise in the mining industry and a 0.2 percent drop at the nation's utilities.

The Consumer Price Index rose by 0.3 percent in December, slower than the 0.8 percent in November, as food costs were flat for the month and energy prices rose by 0.9 percent after an even bigger 5.7 percent jump in November.

Outside of food and energy, inflation rose a more moderate 0.2 percent in December. This measure of core inflation rose by 2.4 percent for all of 2007, down slightly from a 2.6 percent increase in 2006.

The Federal Reserve is closely watching to see whether the jump in food and energy becomes more widespread and starts pushing core inflation higher.

Analysts said that with core prices generally remaining well-behaved, it will give the central bank the leeway to cut interest rates further to battle a serious economic slowdown triggered by a steep slump in housing and a spreading credit crisis.

The expectation is that the Fed will cut a key rate by a half-point when officials meet at the end of this week. Federal Reserve Chairman Ben Bernanke raised hopes for further rate cuts in a speech last week when he said that economic risks had grown significantly in recent weeks.

The rising risk of a recession has prompted politicians to consider stimulus packages to give the economy a jump-start to either prevent a recession or at least mitigate its fallout. President Bush has said he may unveil a plan around his Jan. 28 State of the Union address. Democrats in Congress and presidential candidates in both parties are putting forward their own plans.

The CPI report showed that the 4.1 percent increase in overall prices was the biggest since a 6.1 percent jump in prices in 1990.

Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.

The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005.

Clothing costs and the price of new cars actually fell for the year, both dropping by 0.3 percent, while airline fares, reflecting higher fuel costs, were up 10.6 percent and medical care, always one of the leading areas of price increases, rose by 5.2 percent for 2007.

Workers' wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the biggest setback since a 1.5 percent fall in 2005.

Consumer prices see biggest rise in 17 years

WASHINGTON (Reuters) - Consumer prices rose 0.3 percent in December and for all of 2007 they shot up at the fastest rate in seventeen years, largely because of soaring energy costs, the Labor Department reported on Wednesday.

The Consumer Price Index, the most broadly used gauge of inflation, rose 4.1 percent in 2007, well ahead of the 2.5 percent increase posted in 2006 and the largest 12-month rise since a 6.1 percent increase in 1990.

December's CPI monthly rise followed a sharp 0.8 percent jump in November and was modestly ahead of Wall Street economists' forecasts for a 0.2 percent gain.

Analysts said it underlined the pressure consumer budgets were under but also left room for the Federal Reserve to cut interest rates again at the end of this month to help prop up the economy.

"What this means for monetary policy, it seems, is that there is some room in there for the Fed to go ahead and cut rates without fear that inflation is going to rear up," said Oscar Gonzalez, an economist at John Hancock in Boston.

Stock index futures remained negative after the prices data was issued and bond prices weakened on the slightly higher-than-expected December prices rise. The dollar's value declined against other major currencies.

Still, core prices that strip out volatile food and energy items rose 0.2 percent in December - in line with forecasts - following a 0.3 percent November increase. For all of 2007, core prices were up 2.4 percent following a 2.6 percent pickup in 2006. That was the smallest 12-month rise in core prices since a 2.2 percent increase in 2005.

The department said both food and energy costs rose during the full year of 2007 at the fastest rates since 1990. Energy costs in the 12 months were up 17.4 percent while food gained 4.9 percent.

Energy costs climbed at annual rates of 22.9 percent and 32.9 percent in the first and second quarters last year, then declined 14.8 percent in the third quarter before turning up again in the fourth quarter at a 37.1 percent annual rate.

Michael Metz, chief investment strategist for Oppenheimer & Co. in New York, said the rise in total prices was likely to crimp consumers' ability to spend, one of the reasons that some economists believe the economy may be headed into recession.

"I think the headline number indicates that personal consumption spending is going to continue to disappoint because that really hinders the ability of the consumer to make discretionary outlays," Metz said.

Economic worries grow among voters: poll

WASHINGTON (Reuters) - Voters are growing increasingly concerned about a recession, and the malaise is filtering into their views on the presidential election, according to a Reuters/Zogby poll released on Wednesday.

Some 47.5 percent of those surveyed think a recession is likely in the next year, up from 43.4 percent in the previous month's survey.

For the first time since the recession question was added to the monthly poll in September, more people said a recession was likely than unlikely.

The survey also found that barely more than one in five gave President George W. Bush's administration high marks for economic policy, and many voters thought they would be better off financially with a Democrat in the White House.

When asked which presidential candidate would be best for respondents' financial situation, 20.1 percent said New York Democratic Sen. Hillary Clinton, making her the top vote-getter. Some 17.5 percent were unsure, and 13.6 percent chose Illinois Sen. Barack Obama, another Democrat.

Arizona Sen. John McCain led Republicans with just 10.9 percent of the vote, followed by former Massachusetts Gov. Mitt Romney at 8 percent. Former New York City Mayor Rudy Giuliani trailed well behind with 3.8 percent of the vote.

"We're no longer waiting for the economy to be the No. 1 (election) issue. It is far and away the issue," pollster John Zogby said. "Democrats have a very simple message on the economy: It stinks. It's Bush's fault. A Republican can't say that."

Many economists think the U.S. economy is in or near a recession as the housing market downturn, tightening credit conditions, and steep food and energy costs drag down consumer and corporate spending.

Economic research shows that the incumbent party typically loses the presidential election when the economy slips into recession during an election year.

January's survey of 1,006 likely voters was conducted January 10-11, about a week after a government report showed the unemployment rate spiked to 5 percent in December, the highest in two years.

That report increased fears of an imminent recession, and helped drive U.S. stocks down sharply. Stock markets got off to their worst-ever start this year, which may have contributed to the darkening economic mood among voters.

Americans also grew a bit more pessimistic about the housing market, with just 27.4 percent expecting house prices in their area to rise in the next year. That was down from 30.8 percent a month earlier. Four in 10 think prices will fall, up from 37.4 percent in December's survey.

The national poll had a margin of error of plus or minus 3.1 percentage points.

China tightens controls on food prices

BEIJING - China took its most drastic step yet on Wednesday to slow a rapid rise in politically sensitive food prices, ordering producers to obtain government approval for any further increases.

Beijing has imposed a series of measures in recent months to cool inflation but so far with little effect. Food prices soared by 18.2 percent in November, pushing overall consumer inflation to 6.9 percent, its highest monthly rate in 11 years.

 

Under the new controls, large food producers must obtain government permission to raise prices, while merchants must report increases in retail prices, the country's planning agency, the National Development and Reform Commission, announced. It said authorities can roll back any price increases that are deemed "unreasonable."

Rising consumer prices are especially sensitive for the communist government because they hit China's poor majority hardest. Local officials have been ordered to ensure adequate food supplies ahead of the Lunar New Year in early February, the most important family holiday of the year.

The inflation surge has been blamed on shortages of pork and grain and has been limited so far to food. But efforts to increase supplies have had little effect on prices, and authorities have accused food producers and others of improperly pushing up consumer costs.

The government already has imposed a freeze on gasoline, home heating and other basics whose prices still are state-controlled.

Also Wednesday, the government said a crackdown on illegal pricing has cut the cost of liquefied natural gas in China by up to 19 percent. LNG is widely used in China for cooking.

Investigators found LNG producers and retailers colluded to raise prices or violated government price controls, the NDRC said.

Gas producers are the second industry hit by price-fixing claims after the NDRC said in August that noodle makers illegally colluded to push up retail prices by up to 40 percent.

Japan machine orders, consumer mood dip

TOKYO - Japan's core machinery orders fell in November and a survey showed consumer sentiments at their worst in more than four years, adding to growing worries about a global slowdown.

The indicators, released Wednesday, show both companies and individuals are cutting back on spending, hailing possible trouble ahead for the world's second largest economy.

Exports are expected to slow in coming months given the growing likelihood that the U.S. will slide into a recession as the housing market slowdown and subprime mortgage crisis causes American consumers to spend less. In Japan, too, declining wages here have crimped consumer spending.

Jitters about the U.S. economy and stronger yen sent the Nikkei 225 stock index down 3.4 percent Wednesday to its lowest in more than two years.

A quarterly Bank of Japan survey showed that the percentage of Japanese consumers who said economic conditions had worsened from a year earlier surged to 45.5 percent in December — the highest level since September 2003.

The survey cited rising prices and weaker wages as the reasons for their pessimism, and the number was worse than the 34.1 percent in the previous survey in September. The survey also showed that 46.4 percent polled said they expect the economy will take a turn for the worse a year from now.

Core machinery orders dropped 2.8 percent in November from October, when they jumped 12.7 percent on month, following a 7.6 percent decline in September.

Machinery orders are widely regarded as a leading indicator of corporate capital investment, which accounts for about 15 percent of Japan's economy. Core orders exclude those from electric power companies and those for ships, which are often volatile.

Banking Minister Yoshimi Watanabe acknowledged significant downside risks for the nation's economy.

Speaking in Niigata in northern Japan, Watanabe said the rising losses related to the U.S. subprime mortgage crisis were a reason for worries.

"There are a lot of industries suffering due to high costs," he said.

Home loan demand surges to near four-year high

NEW YORK (Reuters) - U.S. mortgage applications surged last week, with demand hitting its highest in nearly four years as interest rates plunged, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended January 11 surged 28.4 percent to 906.4, its highest since the week ended April 2, 2004.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.62 percent, down 0.11 percentage point from the previous week, and its lowest since the week ended July 1, 2005, when they stood at 5.58 percent.

Interest rates were below year-ago levels at 6.19 percent.

Douglas Duncan, chief economist at the MBA, said the robust data offers a glimmer of hope for housing.

"When consumers see an opportunity, no matter how pessimistic they might be, they take it," he said. "It will improve the underlying state of the industry and the longer rates stay down, the more people will take advantage of the opportunity, so that is a good thing."

Mortgage rates have fallen along with U.S. Treasury yields. The benchmark 10-year U.S. Treasury note yield fell below 3.68 percent on Tuesday, its lowest since July 2003 as stocks plunged and expectations of aggressive interest rate cuts from the Federal Reserve rose. Yields move inversely to price.

Overall mortgage applications last week were 35.9 percent above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 10.1 percent to 687.5.

Fixed 15-year mortgage rates averaged 5.07 percent, down from 5.21 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) decreased to 5.77 percent from 6.04 percent.

DEMAND SURGES

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of new home sales, jumped 11.4 percent to 461.2, its highest since the week ended December 7, 2007. The index came in above its year-earlier level of 439.7, a rise of 4.9 percent.

Demand for home loan refinancing surged last week as the group's seasonally adjusted index of refinancing applications skyrocketed 43.4 percent to 3,575.5, its highest since the week ended April 2, 2004. The index was up 74.8 percent from its year-ago level of 2,045.8.

The refinance share of applications increased to 62.7 percent from 57.7 percent the previous week. The ARM share of activity edged down to 9.2 percent from 9.3 percent.

"This time of the year you always have to be careful about weather patterns and other factors," Duncan said. "I really think this is, at least in some instances, evidence that with mortgage rates dropping and house prices having leveled off or fallen in some places, there is an improvement in affordability underway."

This week ushers in other key data gauging the state of the hard-hit U.S. housing market.

The National Association of Home Builders will release its January NAHB/Wells Fargo Housing Market Index on Wednesday and the Commerce Department will release data on December housing starts on Thursday.

China tells banks to hold yet more cash in reserve

BEIJING (Reuters) - China on Wednesday raised the proportion of deposits that banks must hold in reserve for the eleventh time since the start of 2007, extending a long-running campaign to mop up excess cash in the banking system.

The 0.5 percentage point increase in the reserve requirement ratio will take effect on January 25, the People's Bank of China (PBOC) said on its Web site, www.pbc.gov.cn.

That takes the ratio for big banks to a record 15 percent.

"It's no real surprise. Liquidity growth related to the trade surplus and government expenditure was super strong in December," said Ben Simpfendorfer, a strategist at Royal Bank of Scotland in Hong Kong.

In contrast to many other central banks, the PBOC is grappling with how to keep a flood of liquidity that is entering the economy through its huge trade surplus from stoking inflation and causing the economy to overheat.

The trade surplus surged nearly 48 percent in 2007 to $262.2 billion and annual consumer inflation hit an 11-year high of 6.9 percent in November.

The PBOC said the increase was aimed at slowing money and credit growth and at strengthening liquidity management. It last announced a reserve requirement increase on December 8, when it was raised by a full percentage point.

The central bank also raised interest rates six times last year, most recently on December 20.

Zhao Qingming, an economist at China Construction Bank in Beijing, said that the central bank was right to act to pre-empt a surge in lending, which typically takes place in the first few months of the year.

WEATHERING THE STORM

"Judging from historical and international levels, China's bank reserve ratio of 15 percent now is indeed high," Zhao said. "But I don't think there should be a cap to it. As long as it's needed to curb excess liquidity the ratio could go as high as it has to."

The central bank could also raise interest rates again before the Lunar New Year in early February if inflation remains pronounced, Zhao added.

Official sources told Reuters on Monday that the December CPI reading, due to be released next week, would be 6.5 percent. While that would mark an easing from November's annual increase, analysts said that would still represent a significant increase in prices from the previous month.

Qu Hongbin, HSBC's chief China economist, told reporters earlier on Wednesday that the reserve ratio could rise as high as 19 percent this year, although a U.S. slowdown could force Beijing to ease up somewhat on tightening.

Still, Premier Wen Jiabao on Wednesday exuded confidence about the government's ability to steer through any turbulence.

"There are many uncertainties influencing the world economy. Global financial markets are unstable, oil prices remain high and agricultural products are also getting dearer," state radio cited Wen as telling overseas Chinese businessmen.

"I'm confident in telling you that China has made good preparations to face them. We will step up our efforts to restructure the economy and promote a shift in the economic growth model."

European shares slide, London FTSE 100 below 6,000 points

LONDON (AFP) - Europe's main stock markets extended losses in early trade on Wednesday amid widespread gloom over the US economy, with London's leading index below 6,000 points for the first time since mid-August.

London's FTSE 100 index of leading shares was down 1.30 percent at 5,947.00 points shortly after the open. Frankfurt's DAX 30 lost 1.00 percent to 7,491.07 points and in Paris the CAC 40 dropped 1.24 percent to 5,185.67.

The DJ Euro Stoxx 50 index of eurozone shares decreased 1.00 percent in value to stand at 4,099.56 points.

The European single currency stood at 1.4808 dollars.

European stock markets had suffered a major sell-off Tuesday -- with London closing down more than three percent -- in the face of gathering fears of recession in the United States and depressing corporate news, dealers said.

Heading the FTSE losers board early on Wednesday was Experian, the world's largest credit checking company, which slumped 5.33 percent to 355 pence.

It came as Experian said trading conditions were not expected to improve during its latest quarter owing to the squeeze on global credit.

Fears of a US recession also rattled Asian stocks Wednesday, while US stocks plummeted overnight after weak US retail sales data and a multibillion-dollar loss by banking giant Citigroup.

Credit flows worldwide have tightened because big banks have lost billions of dollars in mortgage-related investments, which has forced them to curtail lending and triggered efforts by central banks to boost liquidity.

Many analysts believe the housing and credit woes could destabilize the wider US economy, or even trigger a recession.

IEA sees oil demand unchanged despite US economy fears

PARIS (AFP) - The International Energy Agency kept its 2008 forecast for oil demand unchanged on Wednesday despite growing expectations of a recession in the United States.                

The IEA, a state-backed oil watchdog for industrialised countries, attributed recent record oil prices above 100 dollars per barrel to a number of factors, notably pressure caused by strong demand and falling stock levels.

The forecast for 2008 shows the Paris-based organisation believes another strong increase in oil demand will sustain tension on the market despite the prospect of slowing economic growth in the US, the world's biggest consumer of energy.

In its monthly oil market report for January, the IEA forecast demand in 2008 of 87.8 million barrels per day (bpd), an increase of 2.3 percent or 2.0 million bpd from 2007 levels.

The IEA added that its figures for this year "may be further revised if forthcoming assessments from the IMF and the OECD point to a weaker-than-expected outlook for the US economy."

In 2007, the IEA's estimate for demand was revised up by 150,000 barrels per day to 85.8 million (bpd), an increase of 1.2 percent compared with 2006.

The IEA is far more optimistic about demand in 2008 than exporter group OPEC. Forecasters at the Organisation of Petroleum Exporting Countries estimate demand this year to increase by the smaller amount of 1.3 million bpd.

The critical factor for oil demand in 2008 is likely to be the extent to which the US economy slows down, or even contracts, and the knock-on effects for growth in the rest of the world.

Growth in oil demand follows economic expansion. In the United States, the world's biggest market for oil, a housing crisis and tightening credit conditions are expected to hit the economy.

An increasing number of economists expect the US to slip into a recession this year, with the most pessimistic predicting a protracted downturn.

Consumer spending down sharply

SPENDING DOWN: Consumer spending, the critical bulwark that has kept the country out of recession, is showing signs of cracking. Retail sales plunged by 0.4 percent last month. ADVERTISEMENT

CONSUMER STRUGGLES: Consumers battered by a sinking housing market, rising unemployment and the credit crunch, handed retailers their worst Christmas in five years.

OVERALL CONCERN: Analysts said the worry is that all the problems weighing on the economy could prompt consumers — who account for two-thirds of economic activity — to sharply limit or even stop shopping.

Soft retail sales may signal recession

WASHINGTON (Reuters) - U.S. retail sales fell unexpectedly in December to close out the weakest year at the cash register since 2002, data showed on Tuesday, the strongest signal yet that the economy may be sliding into recession under the weight of a housing and credit crisis.

At the same time, while prices at the farm and factory gate showed their biggest annual increase in more than 25 years last year, they dipped in December. That suggested the Federal Reserve may have room to cut interest rates more to stave off an economic contraction.

The U.S. Commerce Department said retail sales dropped 0.4 percent last month and it revised down November's sales gain to 1.0 percent from a previously reported 1.2 percent.

"If consumers continue to shy away from the shops and the malls, the economy may not be able to avoid a recession," said Chris Rupkey, chief financial economist for Bank of Tokyo/Mitsubishi UFJ.

On Wall Street stocks sank from the opening, weighed down not only by investor fears of pending recession but also by concern over a bigger-than-expected loss at Citigroup Inc (C.N), which said it was cutting jobs and again raising capital from abroad.

The Dow Jones industrial average (.DJI) dropped 277.04 points, or 2.17 percent, to close at 12,501.11. The high tech-laden Nasdaq Composite Index (.IXIC) ended down 60.71 points, or 2.45 percent, at 2,417.59.

Bond yields fell as traders bet that Fed policy-makers will cut interest rates aggressively when they meet at the end of this month to counter softening consumer demand.

The benchmark 10-year U.S. Treasury note fell to a new four-year low around 3.68 percent.

SEEKING HELP ABROAD

Merrill Lynch (MER.N) said it was issuing $6.6 billion in preferred shares to investors, including the Kuwait Investment Authority, as it continues to look overseas to boost its capital after being hit by losses on subprime mortgages.

Last month, Merrill sold a stake in itself to the Singapore government and an asset manager, raising as much as $7.5 billion.

Fed Chairman Ben Bernanke said last week the U.S. central bank was ready to take "substantive additional action" to support growth and provide "insurance" against a downturn.

Bernanke is set to testify before Congress this Thursday on the economy's short-term outlook and lawmakers who are working on their own economic stimulus plan are expected to press him on what is most needed to keep expansion going.

A report on Tuesday from the Congressional Budget Office, requested by Democratic chairmen of the Senate and House of Representatives budget committees, said the goal should be to get money into the hands of low-income consumers quickly because they will most likely spend it.

The Bush administration is considering economic stimulus measures, but Democratic leaders want the White House to agree to work with them on a final plan, which many believe is likely to include rebates to individuals.

TAX TONIC

The White House has pressed Congress to make permanent tax cuts that are scheduled to expire in 2010, arguing that is necessary to build confidence among consumers that their taxes would stay low.

But Treasury Secretary Henry Paulson acknowledged last week that the administration has had little success getting lawmakers on board.

Some economists think the economy may already be in recession because the consumer spending crutch the U.S. economy has relied upon for growth is being kicked away -- a concern the soft retail sales data reinforced.

"This shows us the U.S. consumer, who has been the stalwart holding up the U.S. economy of late, is starting to buckle," said Firas Askari, head of foreign exchange trading for BMO Capital markets in Toronto.

The National Retail Federation reported on Tuesday that its members said their 2007 holiday sales -- which combine November and December sales -- rose a weaker-than-forecast 3 percent to $469.9 billion. The federation had expected a 4 percent increase but said the sales climate deteriorated at year-end.

There were signs that bleaker sales prospects extended into 2008. The International Council of Shopping Centers and UBS Securities LLC said sales last week slipped 0.9 percent and were only up 1.1 percent on a year-over-year basis.

Separately, the Labor Department said the producer price index, which measures prices received by farms, factories and refineries, dipped 0.1 percent in December as fuel prices dropped. However, core prices, which strip out volatile food and energy costs, edged up 0.2 percent.

Retail sales for all of 2007 rose 4.2 percent, a significantly softer gain than the 5.9 percent increase in 2006 and the weakest advance since a 2.4 percent rise in 2002.

Economic data at-a-glance

NEW YORK - Fresh signs emerged Tuesday that the U.S. economic slowdown may be intensifying, increasing the odds of a recession:

• Retail sales fell 0.4 percent in December, the worst showing in six months, an indication that consumers reduced Christmas spending amid worries that the housing crisis will worsen, credit will get tighter and the job market may shrink.

• Inventories held by businesses rose by 0.4 percent in November, reflecting big increases in stockpiles held by manufacturers and wholesalers, a sign more layoffs could be in the offing.

• Inflation at the wholesale level fell 0.1 percent last month, a good ending for a year when soaring oil prices sent producer prices surging to a 26-year high of 6.3 percent.

• Bad bets on mortgages led Citigroup Inc. to a record $10 billion quarterly loss. Bank executives are forecasting steeper declines in home prices.

• Stocks slumped and bonds rose, pushing yields lower, as traders bet that demand will drop as recession fears escalate. The Dow Jones Industrials fell 277.28 points, or 2.17 percent, while the S&P 500 shed 35.35 points, or 2.5 percent. The swoon erased Monday's sharp gains and left both indexes down almost 6 percent in the new year.

• Oil futures fell more than $2 a barrel. Saudi King Abdullah politely rejected President Bush's call for OPEC nations to boost oil production, another indication that investors are more worried about slowing demand than rising inflation.

Dollar under pressure as market bets on big US rate cut

LONDON (AFP) - The dollar came under heavy pressure Tuesday, falling against the euro to near record lows on the view that sharp cuts to US interest rates will be needed to keep the US economy on track, dealers said.

 They said that with inflation data looking relatively benign, the US Federal Reserve could feel freer to slash interest rates by 50 basis points rather than the more routine 25 points when it meets at the end of the month.

Some were even ready to bet such a move could come before the Fed meeting or that the US central bank might resort to a radical cut of 75 points as the fallout from the collapse of the US housing market undermines the economy.

"Weak (US) retail sales numbers, as well as weaker than expected (wholesale price inflation) prompted renewed dollar selling as market players increased the likelihood of a 50-75 basis points rate cut by the Fed in the coming month," said Michael Woolfolk at Bank CMC Markets.

Woolfolk said he believes a 50 basis point cut is a foregone conclusion.

Remarks by former Fed chairman Alan Greenspan that the US economy was likely heading for recession came as US retail sales data showed a fall of 0.4 percent in December, the worst performance in six months and compared with analyst forecasts for a drop of just 0.1 percent.

Inflation at the wholesale level also cooled, with factory gate prices falling 0.1 percent in December.

In late European trade Tuesday, the euro was at 1.4838 dollars, down from 1.4853 dollars in early deals and 1.4866 dollars in New York late on Monday as the currency slipped off day-highs of above near record 1.49-levels.

The dollar dropped to 107.04 yen from 108.17 yen late Monday.

Dealers said all eyes were now on US consumer price inflation data due out Wednesday, with soft figures likely to put the dollar under further pressure.

The slippage in the euro meanwhile probably reflected a drop in a key German indicator of business sentiment, sparking some profit-taking.

Elsewhere, the pound sterling was firmer as UK inflation data showed the key annual CPI rate staying stubbornly at 2.1 percent in December -- above the Bank of England's 2.0 percent target -- for the third month in a row.

That perspective tempered some of the speculation that the Bank of England would have to cut interest rates sharply in coming months, dealers said.

In European trading on Tuesday, the euro changed hands at 1.4838 dollars against 1.4866 late Monday, at 158.85 yen (160.83), 0.7546 pounds (0.7598) and 1.6204 Swiss francs (1.6249).

The dollar stood at 107.04 yen (108.17) and 1.0922 Swiss francs (1.0927).

The pound was at 1.9666 dollars (1.9561).

On the London Bullion Market, the price of gold rose to 913 dollars an ounce from 902 dollars late on Monday.

Retail sales unexpectedly declined in December

WASHINGTON (Reuters) - Sales at U.S. retailers fell 0.4 percent in December and were less vigorous in November than previously thought, according to a government report on Tuesday that implied costlier energy and slumping housing prices were taking a toll on consumers.

Retail sales for all of 2007 posted their smallest gain in five years.

Excluding autos, the Commerce Department said December sales still were down 0.4 percent. Wall Street economists surveyed by Reuters had forecast that overall sales and sales excluding automobiles would be unchanged in December.

The department revised down November's sales gains to show a 1 percent rise rather than the 1.2 percent gain it reported a month ago.

For the full year 2007, department officials said retail sales were up 4.2 percent, a significantly softer gain than the 5.9 percent increase posted for 2006 and the weakest annual gain since a 2.4 percent rise in 2002.

Consumers have been a mainstay of the economy over the past year, continuing to spend despite rising gasoline and other costs, so the fresh signs of a pullback by shoppers are likely to fuel fears of recession.

Sales in department stores fell 0.4 percent in December following a 0.5 percent gain in November.

Citi writes off $18 billion, Merrill gets capital

LONDON (Reuters) - Citigroup wrote off a colossal $18.1 billion on Tuesday and secured new capital as Merrill Lynch, also seen heading for big losses due to the U.S. subprime mortgage meltdown, announced a $6.6 billion shot in the arm.

Citi, the largest U.S. bank by assets, announced an overall fourth quarter loss of $9.83 billion -- its first quarterly loss since its creation in 1998 -- on the back of losses tied to subprime home loans and other risky debt.

It said it was raising $14.5 billion from offerings of convertible preferred securities and cut its dividend. Saudi Arabia's Prince Alwaleed and the government of Singapore were among the recipients.

"Believe it or not, the write-downs are better than what was being discussed. Yesterday, I saw an analyst estimate of $27 billion," said William Smith, Chief Executive Officer of Smith Asset Management in New York. "It wasn't the worst case scenario."

U.S. investment bank Merrill said it would issue $6.6 billion in preferred shares to investors, including the Kuwait Investment Authority, the Korean Investment Corp and a unit of Japan's Mizuho Financial Group, as it looked to shore up its capital base.

The New York Times on Friday reported Merrill was expected to suffer $15 billion in losses stemming from bad mortgage investments, when it releases its fourth quarter results on Thursday. It wrote off $8.4 billion in the third quarter.

Banks, wrestling with huge losses stemming from U.S. mortgages lent to people ill-equipped to repay them, have actively been seeking cash from abroad.

In December, Merrill secured as much as $7.5 billion by selling a stake to Singapore's government and an asset manager. The month before Citi agreed to sell up to a 4.9 percent stake to Abu Dhabi for the same amount.

Other big names such as State Street and JP Morgan also report results this week, which is shaping up to be a pivotal one in the credit crunch saga.

"The market is set up for bad news," said Adam Cole, global head of FX currency strategy at RBC Capital Markets.

CENTRAL BANK LITMUS TEST

At 1500 GMT, the Federal Reserve, European Central Bank and Swiss National Bank will announce results of their latest "term auctions," which offer billions of dollars in short-term money to banks to try and ease the credit market logjam.

The results will show how much demand there remains for central bank cash, and therefore how tough it is to secure money via interbank lending which has dried up since August when banks realized they did not know which were dangerously exposed to the U.S. subprime sector.

The Fed has put up $30 billion this time, under a coordinated central bank plan hammered out in December, the ECB $20 billion and the SNB $4 billion.

The Bank of England also weighed in, charging a minimum rate of 5.14 percent at its offer of 10 billion pounds of 3-month money on Tuesday, well below its official 5.50 percent rate, suggesting money market conditions continue to ease.

Interbank lending rates have tumbled since the central banks took joint action to pump cash into the money market.

The interbank cost of borrowing euros, dollars and sterling broadly fell again on Tuesday, particularly dollar rates as investors continued to price in sharp U.S. interest rate cuts.

But most experts say ongoing losses at major banks means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

Former U.S. Federal Reserve Chairman Alan Greenspan said the U.S. economy was probably in or about to enter a recession.

The odds are "not overwhelming but they are marginally in that direction" of recession, Greenspan was quoted as saying in a Wall Street Journal interview, published on Tuesday.

The worldwide scope of the wreckage from the U.S. subprime mortgage crisis was again amply demonstrated.

Australian property investor Centro Property Group, which is struggling to refinance its debt, said its current liabilities may be higher than previously stated, sending its shares down as much as 48 percent.

Centro, which owns and manages 700 shopping malls in the United States, has put itself up for sale after falling victim to the credit crunch.

Canadian Imperial Bank of Commerce said on Monday it would take almost $2.5 billion in before-tax writedowns related to the subprime mortgage crisis, and raise about C$2.75 billion ($2.70 billion) in stock sales to rebuild its balance sheet.

German economy grows by 2.5 percent

BERLIN - The German economy grew by a solid 2.5 percent last year, helped by strong exports, but a downbeat survey of investor confidence pointed to clouds on the horizon for Europe's biggest economy.

The preliminary 2007 growth figure, released Tuesday by the Federal Statistics Office, compared with the previous year's increase of 2.9 percent in gross domestic product — Germany's best performance since 2000.

The Federal Statistics Office also said that Germany balanced its budget last year, eliminating a budget deficit that ran at 1.6 percent in 2006 and in previous years breached a European Union-mandated limit of 3 percent of GDP.

The growth estimate for 2007 was in line with economists' forecasts, and was slightly better than the government's prediction of 2.4 percent.

The statistics office said German exports, a traditional strong point, grew by 8.3 percent last year and accounted for more than half of the growth in GDP.

The export growth translated into GDP growth of 1.4 percent. Domestic stimuli — above all companies' investment in equipment — grew by 8.4 percent, contributing another percentage point to GDP, the office said.

Growth expectations last year initially were clouded by the government's move to raise value-added tax from 16 to 19 percent on Jan. 1, 2007 — a decision that was aimed at keeping the budget deficit in check.

The economy emerged unscathed and the government managed to balance its budget for the first time since 2000, when it was helped by revenue from the auction of new-generation mobile phone licenses.

Still, private consumption declined by 0.3 percent last year, the Federal Statistics Office said.

"Net exports continued to be a reliable and the most important growth contributor last year," said Alexander Koch, vice president and economist with UniCredit Markets and Investment Banking.

"The German export sector benefited disproportionately from strong global demand and defended its title as world champion in merchandise exports for the fifth consecutive year, ahead of China," he noted.

A separate survey of investor confidence Tuesday underlined expectations of a bumpier ride in 2008. The ZEW institute said its monthly survey dropped to minus 41.6 points from minus 37.2 in December — worse than the minus 40 economists had forecast.

"The largest risk for the development of the German economy is the danger of a recession in the United States following the financial market crisis," ZEW said in a statement. "Together with a strong euro it might undermine exports."

Economy Minister Michael Glos has said that he plans to reduce the government's 2008 growth forecast of 2 percent, although he has not specified a new figure.

On Tuesday, he described the 2007 figures as "a solid basis for the continuation of the upswing this year."

Fourth-quarter growth figures will not be released until next month, but the statistics office tentatively estimated growth at 0.25 percent — down from a third-quarter figure of 0.7 percent.

"The recent downward trend in business expectations clearly points to soft growth dynamic also at the beginning of 2008," Koch said.

"However, we still rate the chances for an abrupt end to the economic upswing as very low," he added. "We maintain our forecast of another year of respectable growth for 2008."

Holger Schmieding, Bank of America's chief European economist, predicted "a soft start and a stronger finish" for the economy in 2008.

In the early part of the year, he said, high oil and food prices likely will dampen consumer spending, while "global uncertainties, much slower growth in the U.S. and the U.K. and the strong euro will dampen export growth and the readiness to invest at home."

He also pointed to a potential risk from possible government moves to expand minimum wages to new sectors, cautioning that "investment could lose momentum and the pace of job creation could slow down seriously."

Dollar thumped by rising US rate cut expectations

NEW YORK (AFP) - The dollar slumped to a near-record low against the euro Monday on feverish speculation the Federal Reserve will slash interest rates aggressively to bolster the battered US economy, dealers said.

 The euro was at 1.4866 dollars around 2200 GMT, up from 1.4775 here late Friday. In earlier European trade, the 15-nation currency rose as high as 1.4914 dollars, within a whisker of its all-time peak of 1.4967 on November 23.

The dollar slipped to 108.17 yen from 108.81 Friday.

Speculation raced that the Fed would cut at least half a percentage point off the federal funds rate, currently pegged at 4.25 percent, at its next meeting on January 29-30, or even sooner.

Remarks by Fed chairman Ben Bernanke last week, in which he said the US central bank stood ready "to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," sent analysts scurrying to revise rate-cut estimates upward.

The Fed has lowered the key rate by a full percentage point in three moves since September.

Stephen Malyon, currency strategist at Scotia Capital, said the option market had priced in an over 44 percent chance that the Federal Open Market Committee (FOMC) will cut interest rates by three-quarters of a percentage point on January 30.

"With the FOMC meeting still two weeks away, rumors are also circling over the potential for an inter-meeting Fed cut," Malyon said.

"At this point it becomes very difficult to judge the likelihood of such an event; however whether they cut inter-meeting or not the theme remains the same: with US interest rates dropping faster than global rates, the US dollar is losing increasingly larger amounts of interest rate support."

For Ashraf Laidi at CMC Markets, the dollar is tumbling "against all major currencies as markets increasingly expect an aggressively dovish Federal Reserve to slash interest rates by at least 75 basis points in the next two months, with the probability of a 50 basis point rate cut before the next meeting also rising."

A strong Wall Street stocks rally spurred by investors' rate-cut hopes also weighed on the dollar.

"A triple-digit Dow Jones Industrial Average rally effectively fueled the dollar decline; rallying risky asset classes have recently forced the opposite move in the downtrodden US dollar," said David Rodriguez at Forex Capital Markets.

Meanwhile, the pound also fell to new lows against the euro on expectations the Bank of England will cut interest rates in February and again in the months ahead, albeit at a more cautious pace than the Fed.

Consumer price inflation figures, due Tuesday, will be key to those expectations, with analysts expecting benign price growth to allow further easing by the Bank of England.

In late New York trade Monday, the dollar was at 1.0927 Swiss francs, down from 1.1012 Friday.

The pound was at 1.9561 dollars, down slightly from 1.9564.

Overview: Gold rises as dollar falls

Gold spearheaded a surge in global commodity prices on Monday against a backdrop of mounting concerns about the US economy, talk of aggressive interest rate cuts by the Federal Reserve and steep losses for the dollar.

Gold rose as high as $914 before easing back, and was above $900 late in New York. There was a bullish tone to the rest of the precious metals complex, with platinum hitting a fresh record high and silver touching a 27-year peak.

However, John Reade, precious metals analyst at UBS, said: "It is clear that there are very large speculative positions present in gold and that gold is vulnerable to a sharp correction in price at any time."

Oil prices snapped a three-day losing streak in spite of worries that a US economic slowdown could hurt demand. February West Texas Intermediate, the US benchmark crude price, climbed $1.51 to $94.20.

Agricultural commodities also had a strong session, with corn, wheat and soyabeans all continuing to benefit from last week's US Department of Agriculture crop report.

On the currency markets, the dollar fell to its lowest-ever level against the Swiss franc and seven-week lows against the euro and the yen as investors increasingly moved to price in a 75 basis point cut in US interest rates at the end of this month.

There was also much talk that the Federal Reserve could move before its policy meeting on January 30.

Ashraf Laidi, chief FX analyst at CMC Global Markets, noted that a string of key US economic indicators were due out this week, including retail sales, industrial production figures and the Philadelphia Fed index of manufacturing activity.

"A dismal showing in these indicators coupled with continued selling in US equities will likely prompt the Fed into cutting rates as early as this week," Mr Laidi said.

"With US equity indices testing their August lows and current macroeconomic dynamics knocking at the door of recession, we place the probability of a 50 basis point inter-meeting rate cut as high as 70 per cent."

Interbank dollar rates fell sharply as investors focused on the possibility of aggressive Fed easing. The three-month dollar Libor rate fell 20bp - the most since September 19, the day after the US central bank cut its key funds rate 50bp.

US and European equity markets managed tentative rebounds on Monday as encouraging quarterly earnings from IBM kickstarted a crucial week of corporate results.

Of most interest to investors will be figures from some of Wall Street's biggest investment banks, including Citigroup and Merrill Lynch, amid concerns that there might be further writedowns related to subprime mortgages.

Julian Jessop, at Capital Economics, said this might not necessarily be a cause for alarm.

He said that even if writedowns far exceeded current estimates, it would at least remove some of the uncertainty about banks' exposures.

Mr Jessop said that with new management now in place in many US banks, there was a stronger incentive to get as much bad news out as early as possible.

He added: "Nonetheless, we remain concerned that the consensus is under estimating the impact of the economic slowdown on US corporate earnings of all types."

Late in New York, the Dow Jones Industrial Average had closed up 1.4 per cent, the S&P 500 rose 1.2 per cent, while the Nasdaq Composite gained 1.6 per cent.

Last week, the benchmark indices fell to their lowest levels since August.

In Europe, the FTSE Eurofirst 300 index edged up 0.2 per cent from a 13-month low struck on Friday, while the FTSE 100 in London also gained 0.2 per cent.

Asian markets remained under pressure from concerns about the impact of a US slowdown on leading exporters.

Hong Kong fell 1.5 per cent and Singapore 2.1 per cent, although Taipei climbed 1.8 per cent after victory for the country's pro-China opposition party in parliamentary elections over the weekend. Japanese markets were closed for a holiday.

Short-dated US government bonds remained supported by the prospect of further Fed easing.

The yield on the rate-sensitive two-year Treasury touched a three-year low of 2.52 per cent before pulling back to 2.56 per cent, down 2bp on the day.

Clinton, following Bill's example, focuses on economy

WASHINGTON (AFP) - With recession fears looming large in the US presidential election, Democrat Hillary Clinton is offering a plan to rescue the US economy and woo voters worried about their pocketbooks.

America's wobbly economy has become a top issue of concern among US voters, putting the issue at the forefront of campaign speeches among Repubublican and Democratic hopefuls seeking their parties' respective nominations.

Republicans are campaigning hard in Michigan ahead of the party's primary there on Tuesday, vowing to bring jobs to the state, which is home to a struggling auto industry and the nation's highest unemployment rate.

Democratic contenders, meanwhile, have presented rival plans to halt the decline of the country's mighty economy.

"What people are talking to me about is the economy," Clinton told NBC television on Sunday. "We're slipping toward recession. Some people think we're in recession right now."

"I've proposed a very vigorous package of economic action that I think would ... forestall and mitigate against what is going on in the economy," she said.

The former first lady -- whose husband Bill Clinton's campaign in 1992 had the famous campaign mantra "it's the economy, stupid" -- unveiled Friday a 70 billion-dollar plan aimed at injecting new life into the US economy.

Her proposal includes 30 billion dollars to help states mitigate the impact of foreclosures linked to the mortgage crisis, 25 billion for households struggling to pay heating bills and 10 billion for unemployment assistance.

Her top rival for the nomination, Senator Barack Obama, presented Sunday his own 75 billion dollar plan, which includes tax cuts for low-income Americans as well as help for the unemployed and relief for the housing crisis.

"The time has come to bridge the growing divide between Main Street and Wall Street," Obama said in a statement, adding that his plan would "jumpstart the economy by putting money in the pockets of those who need it most and will spend it quickly."

Clinton's campaign quickly derided Obama's proposal as a meager copy of her plan.

"We are heartened to see that Senator Obama has followed Senator Clinton's lead and announced a stimulus package that borrows heavily from Senator Clinton's, but it nonetheless comes up short," said her economic adviser Gene Sperling in a statement.

Former senator John Edwards, meanwhile, who is running third in the Democratic race, has struck a populist theme calling for an end to tax breaks for the rich.

The rival plans seek to stop the economy from plunging into a recession that has become the top concern among economists.

Senator Clinton's new focus on the economy may draw comparisons to her husband's 1992 campaign, when he ran hard on the issue as the country emerged from a recession.

But if the recession ends in late 2008 as many economists predict, the next US president would be saved from having to implement a rescue plan.

Analysts, who believe a targeted and temporary plan quickly needs to be implemented, will be closely watching President George W. Bush's State of the Union address to Congress on January 28.

Candidates from Bush's Republican party, meanwhile, are preaching classic conservative themes of limited government spending inspired by their icon, the late former president Ronald Reagan.

"The kind of short-term stimulus you need is to present the picture, realistic picture, of an economy that's going to grow," former New York mayor Rudolph Giuliani, whose Republican bid is flagging, said Sunday.

For the Republicans, Michigan is the next big test after Iowa was won by former Arkansas governor Mike Huckabee and Senator John McCain took New Hampshire.

McCain, showing his "straight-talking" candor, told Michigan rallies that some lost jobs would never return.

But with polls showing the state's race resting on a knife's edge, Romney retorted: "I will not rest, as president, until Michigan's economy has turned the corner and is growing again."

Romney, a successful and wealthy businessman fighting to save his campaign in Michigan, has proposed "rolling back tax rates across the board."

Huckabee, for his part, wants to "completely eliminate all federal income and payroll taxes" and called for training programs for the unemployed as well as free trade deals.

China's nerves on edge over inflation

BEIJING (Reuters) - Chinese policy makers will have a tough time in 2008 battling inflation, excess liquidity and rapid investment, Vice Finance Minister Li Yong said on Sunday.

China has taken a series of measures such as cutting export tax rebates and tightening investment criteria to cool an economy that expanded 11.5 percent in the first nine months of 2007 compared with a year earlier.

The central bank also raised interest rates six times last year and ordered banks on 10 occasions to set aside more deposits in reserve.

"Although these policies are working well, there is still a shortfall from the desired and expected effects," Li told a forum.

Consumer prices rose 6.9 percent in the year to November, the fastest pace in a decade, setting alarm bells ringing in the halls of power.

Chen Jiagui, vice head of the Chinese Academy of Social Sciences, said the State Council, or cabinet, held an emergency price meeting last Friday and would hold another one on Monday.

The State Council said after yet another conclave devoted to inflation last Wednesday that it would keep a freeze on energy prices and would temporarily intervene directly in the market to hold down prices of daily necessities.

With climbing global grain and raw material prices adding to domestic price pressures, China's year-average inflation could be as high as 4.6 percent in 2008, Xu Lin, a senior official from the National Development and Reform Commission, said on the sidelines of the forum.

That would match the rate for the first 11 months of 2007.

HANDS TIED

Li said inflationary pressure was still mounting, but China now had less room for maneuver even though it shifted its monetary stance in early December to "tight" from "prudent."

Banks' reserve requirements were already at a historical high of 14.5 percent, while it was difficult to raise interest rates further given that rates are falling in countries such as the United States, Li said.

Even without an attractive interest rate differential, the U.S. credit crisis could trigger unwanted speculative capital flows into China, especially at a time when global investors view emerging markets as a relatively safe haven, he said.

Li said China's trade surplus, which rose 48 percent last year to a record $262.2 billion, was likely to remain elevated in the first half of 2008, adding to liquidity in the banking system.

With the yuan also on an appreciating track, the problem of excess liquidity was unlikely to fundamentally ease any time soon, the official warned.

Li said the impetus behind fixed-asset investment remained strong as the large number of projects launched in 2007 would require continued capital spending this year.

Closer coordination of fiscal and monetary policy was needed to tackle the array of problems, Li said.

The Finance Ministry is considering issuing more types of treasury bonds so that the central bank has a broader range of paper with which it can conduct open market operations, Li said.

Speaking at the same forum, newly promoted deputy central bank governor Yi Gang said the People's Bank of China would fight inflation by further tightening monetary policy, but it would do so cautiously to ensure stable economic growth.

"We will unwaveringly fight against inflation and implement a tightening policy. But we will make sound arrangements to ensure fairly stable economic growth," Yi told reporters.

Chinese property and share prices, though very high in some cases, were close to their equilibrium levels, he added.

Pelosi and Bernanke to discuss economy: aide

WASHINGTON (Reuters) - Federal Reserve Chairmen Ben Bernanke will meet on Monday with House of Representatives Speaker Nancy Pelosi to discuss how they can work together to boost the U.S. economy, a spokesman for Pelosi said.

Falling home values, higher oil prices and a decline in the stock market have raised concerns that the United States could slip into recession this year.

Pelosi will meet one-on-one with Bernanke to get his views on what steps Congress should take, as well as to let him know what ideas Democratic leaders are considering, Pelosi spokesman Brendan Daly said on Saturday.

It will be a "mutual exchange," Daly said.

Bernanke, who earlier this week sent a strong signal that the Fed was prepared to cut interest rates further to spur growth, also will speak to House Democrats at their policy retreat later this month, Daly said.

Many prominent economists believe Congress should supplement any Federal Reserve action with a temporary fiscal stimulus package that could include tax breaks.

Pelosi and Senate Majority Leader Henry Reid have asked to discuss the issue with President George W. Bush soon after he returns on Wednesday from a trip to the Middle East.

Treasury Secretary Henry Paulson said late on Friday that Bush still had not decided whether a stimulus package was needed. But Paulson's other remarks left little doubt the White House was mulling such measures.

"Time will be of the essence," Paulson said on Bloomberg Television's "Political Capital with Al Hunt" program. "so I think we want to do something as quickly as possible if we do it. ... It's going to be easier get something done on a temporary basis."

The New York Times reported on Saturday that Bush could unveil his ideas to stimulate the economy, most likely in the form of tax relief, in his State of the Union speech to Congress on January 28.

AP poll: Economy ties war as top issue

WASHINGTON - The faltering economy has caught the Iraq war as people's top worry, a national poll suggests, with the rapid turnabout already showing up on the presidential campaign trail and in maneuvering between President Bush and Congress.

 Twenty percent named the economy as the foremost problem in an Associated Press-Ipsos poll released Friday, virtually tying the 21 percent who cited the war. In October, the last time the survey posed the open-ended question about the country's top issue, the war came out on top by a 2-1 majority.

About equal proportions of Republicans, Democrats and independents in the new poll said the economy was their major worry, suggesting the issue looms as a potent one in both parties' presidential contests. It was also cited evenly across all levels of income, underscoring the variety of economic problems the country faces.

Amid increasing trade, job, housing, stock market and gasoline price woes, candidates from each party have started talking about how they would bolster the economy. The issue looms as the dominant one in the next presidential contest: Tuesday's Republican primary in Michigan, which had a 7.4 percent unemployment rate in November that is the nation's worst.

Even as signs of economic weakness in this country have grown in recent months, U.S. and Iraqi casualties in Iraq have been dropping since the summer. Though most in the U.S. remain against the war, growing numbers say they think President Bush's troop increase last year has been working, and politicians say the issue is raised with decreasing frequency by constituents.

"The lines are crossing now," said Whit Ayres, a Republican pollster not working for a presidential candidate. "As Iraq becomes more stable and less violent, concern about Iraq is diminishing. It will still be an important issue, but the economy is filling the vacuum."

Economic concerns were voiced about evenly in most parts of the country in the AP-Ipsos survey. It was particularly high in the Rust Belt region of Michigan, Illinois, Indiana, Ohio and Wisconsin, states that are expected to be pivotal in the November election. About one in three there named the economy.

The poll offered another example of economic anxiety as an index measuring consumer confidence fell to its all-time low in the six years Ipsos has been measuring it. The RBC Cash Index dropped to 56.3 in early January, down from 65.9 in December.

The war was the top problem mentioned by three in 10 Democrats, about twice the number of Republicans who listed it. About one in five independents also put it as the top concern.

Health care was another important issue for Democrats, while Republicans also named morality, immigration and terrorism.

In exit polls of voters in last Tuesday's New Hampshire presidential primaries, people in both parties named the economy as their top concern, including 38 percent of Democrats and 31 percent of Republicans. Of those citing the economy, the most votes went to Hillary Rodham Clinton for Democrats and John McCain among Republicans — and each won their party's contest.

In the Jan. 3 Iowa presidential caucuses, the economy was tied with Iraq for most important issue among Democrats. Illegal immigration was the most mentioned by Republicans, followed by the economy. The winners in that state — Republican Mike Huckabee and Democrat Barack Obama — also got the most support among those chiefly worried about the economy.

On Capitol Hill, Democratic leaders are considering crafting legislation for stimulating the economy that might include tax rebates, longer unemployment benefits and more food stamps. Bush has said he is watching to see if federal steps will be needed, which officials have said might include tax rebates for individuals and tax breaks for business investment.

On Friday, House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., wrote Bush saying they should try to agree quickly on a package. Still, a clash could well occur because there is a history of Democrats seeking more spending and narrower tax cuts than Republicans want.

The issues question in the AP-Ipsos poll was asked of 535 people in telephone interviews conducted from Jan. 7-9. Their responses had a margin of sampling error of plus or minus 4.2 percentage points.

AP Poll method, questions and results

The Associated Press-Ipsos poll on the most important problem facing the country was conducted January 7-9, 2008 and is based on telephone interviews with a nationally representative random sample of 535 adults from all states. ADVERTISEMENT

Digits in the phone numbers dialed were generated randomly to reach households with unlisted and listed landline numbers.

Interviews were conducted in both English and Spanish.

As is done routinely in surveys, results were weighted, or adjusted, to ensure that responses accurately reflect the population's makeup by factors such as age, sex, region and race.

No more than one time in 20 should chance variations in the sample cause the results to vary by more than plus or minus 4.2 percentage points from the answers that would be obtained if all people in the U.S. were polled.

There are other sources of potential error in polls, including the wording and order of questions.

The questions and results for this poll are available at http://www.ap-ipsosresults.com

Paulson: Fiscal stimulus should be quick, temporary

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson said on Friday that any economic stimulus program should be temporary and designed to kick in quickly if it is to be useful.

"Time will be of the essence," Paulson said on Bloomberg Television's "Political Capital with Al Hunt" program. "So I think we want to do something as quickly as possible if we do it."

Paulson conceded that U.S. economic growth "is slowing down rather materially," but insisted that he still thought it would keep growing rather than fall into recession.

Though Paulson said U.S. President George W. Bush was still undecided as to whether any stimulus is needed, his remarks left little doubt that the White House is mulling such measures.

"The president is focused on the risk and has his economic team looking at the risks and what we can do to help the economy this year," Paulson said.

Bush is scheduled to deliver his annual State of the Union address to Congress on January 28 and that is widely regarded as the most likely venue for proposals that Paulson said would have to be temporary.

The Bush administration is a long-term champion of lowering taxes and wants to make tax reductions from 2001 and 2003 that are scheduled to expire in 2010 permanent. But Paulson conceded a Democratic-controlled Congress was unlikely to do so.

"It's going to be easier to get something done on a temporary basis," he said. "We've not been able to persuade Congress to make the tax relief permanent. If something were to get done here, I think the focus would be on something that's temporary and that could get done and make a difference soon."

Speculation has centered around some type of tax rebates for individuals, which would spur spending, or tax breaks for businesses that would be targeted to additional investment.

Paulson, however, sounded less upbeat about the economy, despite saying he thought it would avoid recession.

"The economic news is mixed," he said. "There are risks to the downside."

Earlier this week, Federal Reserve Chairman Ben Bernanke also sounded a bleaker note about the economy's prospects, indicating the U.S. central bank stood ready to cut rates further to counter what he saw as rising downside risks from a severe housing downturn and credit market turmoil.

Bernanke's pledge to employ monetary policy more aggressively to avoid recession effectively raised the stakes on the Bush administration to do all it can to add fiscal stimulus, especially with the November presidential vote on the horizon.

Already on Friday, Democratic presidential nominee Hillary Clinton proposed a $70 billion package of emergency spending, targeting it toward helping low-income families hurt by the mortgage crisis as well as aid poor and unemployed Americans.

Trade gaps widens in Nov on higher oil

WASHINGTON (Reuters) - The trade deficit jumped in November to its highest level in 14 months as surging oil prices overpowered a ninth consecutive month of record exports, the Commerce Department said on Friday.

The trade gap widened 9.3 percent to $63.1 billion, the largest month-to-month gain in more than two years.

The trade data added to pessimism about the U.S. economy, which many analysts believe is teetering on the edge of recession because of a severe housing market downturn.

"It's negative for fourth-quarter GDP, pushing us back below the 1 percent level," David Wyss, chief economist at Standard and Poor's Rating Services in New York.

Federal Reserve Chairman Ben Bernanke on Thursday all but guaranteed the Fed would cut interest rates later this month, saying it stood ready to take "substantive additional action to support growth."

The wider-than-expected deficit dragged the dollar lower against the yen, although traders remained focused on developments in the financial sector.

U.S. stocks fell on fears that mounting credit card defaults at companies such as American Express Co (AXP.N) herald a slowdown in consumer spending, increasing the likelihood of recession.

OIL DRIVES DEFICIT HIGHER

Average prices for imported oil surged nearly 10 percent to a record $79.65 per barrel in November, lifting petroleum imports to a record $34.4 billion.

Oil prices were up nearly 53 percent from November 2006.

A Labor Department report on Friday showed petroleum import prices dropped 0.6 percent in December, their first decline since August. However, oil prices topped $100 per barrel last week, a sign of future pressure on the trade gap.

Although total imports of goods and services increased 3 percent in November to a record $205.4 billion, oil prices were mostly to blame for the spike in the deficit, U.S. Commerce Secretary Carlos Gutierrez said in an interview.

"It took us off the trend we were on," he said, acknowledging trade may not contribute as much to fourth-quarter U.S. economic growth as it has in previous quarters.

"That's another reason we need to open up more markets," Gutierrez said, making a pitch for congressional approval of free trade pacts with Colombia, South Korea and Panama.

Despite worse-than-expected December retail sales, Gutierrez said he remained hopeful December figures would show overall consumer spending remained strong.

"We're still expecting consumer spending to add to GDP growth in the fourth quarter," he said.

SpendingPulse, the retail data service of MasterCard Advisors, an arm of MasterCard Worldwide (MA.N), said on Friday retail sales were flat in December despite hefty discounts and other incentives to entice shoppers to spend more on the holidays.

'FAILED TRADE POLICY'

Sen. Sherrod Brown, an Ohio Democrat, said the data made a more compelling case for legislation to combat China's "currency manipulation" and to help retrain workers who have lost their jobs because of imports or factories moving overseas.

"From failed trade policy to a weak dollar to dependence on foreign oil, today's report underscores just how abysmal current economic policies have been for middle class families," he said.

Imports from China slipped in November from the record set in October. But the year-to-date deficit with China totaled $237.5 billion through the end of the 11th month -- topping the annual record of $232.6 billion set in 2006.

U.S. exports of goods and services hit a record $142.3 billion in November, but grew only 0.4 percent compared with about 1 percent in the prior two months -- suggesting a slowdown in foreign demand for U.S. goods despite the cheap dollar.

"Four-tenths of an increase is not a wonderful number," said Oscar Gonzalez, an economist at John Hancock Financial Services In Boston. "But I think going forward, we are going to see more on the order of 1 percent growth."

Strong exports have helped prop up the U.S. economy as the housing sector has sagged. Exports rose more than 12 percent in the first 11 months of 2007, while imports increased only 5.6 percent.

The trade gap through the end of November totaled $650 billion, compared with $698 billion in the same period in 2006.

Jittery shoppers kept retail sales flat in Dec

NEW YORK (Reuters) - Retail spending by Americans was little changed in December as consumers anxious over the housing slump and high oil prices held back on purchases during the crucial holiday season, a report released on Friday showed.

U.S. retail sales excluding cars were unchanged last month, the first time in more than a year that they did not post a gain, according to data published by SpendingPulse.

December's stagnant sales followed a robust 0.8 percent increase in November despite many retailers offering hefty discounts and other incentives to entice shoppers.

The year-end retail picture was even more dismal without accounting for what consumers paid for pricey gasoline. Sales excluding autos and gasoline fell 0.7 percent last month, said SpendingPulse, the retail data service of MasterCard Advisors, an arm of MasterCard Worldwide (MA.N).

"This is the lowest holiday sales growth in the past four to five years," said Michael McNamara, SpendingPulse's vice president of research and analysis.

The risk of a softening crucial consumer sector, which accounts for more than two-thirds of the U.S. economy, has intensified amid signs of deterioration in the labor market.

"It's been employment holding things up so it's a concern to see an uptick in unemployment," McNamara said.

A week ago, the Labor Department said the U.S. jobless rate spiked up to 5 percent in December, a two-year high.

BROAD WEAKNESS IN DECEMBER

With few exceptions like groceries and online shopping, consumers broadly curbed their spending in the final month of 2007.

SpendingPulse's "core" gauge on retail sales fell 0.5 percent last month, the first negative reading since April. In November, core retail sales increased 1.1 percent.

The core reading excludes autos, gasoline and building materials, whose sales tend to be volatile month-to-month.

On Thursday, many retailers warned of sales slowing further this year. Two-thirds of them missed their December same-store sales expectations, according to Retail Metrics.

"You are looking at very modest growth going into 2008," said SpendingPulse's McNamara.

But he added year-to-year sales growth seemed to be holding in a 2 percent to 4 percent range. "We haven't seen any significant deterioration," he said.

The SpendingPulse data are derived from the aggregate sales in the MasterCard U.S. payment network, coupled with estimates on all other payment methods including cash and check.

IMF sees US avoiding recession, Fed moves "supportive"

WASHINGTON (AFP) - The International Monetary Fund sees the US economy avoiding recession, despite financial sector turmoil and a housing sector slump, a spokesman said Thursday.

"Although the recession risks have increased, at this point we do not forecast a recession," IMF spokesman Masood Ahmed said at a news conference.

Recent Federal Reserve actions aimed at buffering the fallout from the housing crisis and tighter credit on the broader economy have been "supportive and timely" to date, he said.

 

The Fed has lowered its base federal funds rate by a full percentage point in three consecutive moves since September, to 4.25 percent.

For the overall global economy, Ahmed said the downside risks cited by the IMF's latest twice-yearly World Economic Outlook (WEO) report, published in October, have materialized and "growth prospects are being dampened."

The IMF said in late November that it would likely lower its 2008 global growth forecast due to surging oil prices and financial turbulence.

An updated WEO report will be issued on January 25 that will include the 2008 and 2009 forecasts, the spokesman said.

In the October report, the IMF predicted the world economy would grow by 4.8 percent in 2008, slowing from a robust 5.2 pace in 2007.

The IMF this week unveiled about a half-percentage-point downward revision to its global growth estimates each year for the 2002-2007 period, due to the adoption of a new international system of calculating purchasing power parity (PPP) exchange.

Based on the new statistical calculations of PPPs, 2007 global growth was 4.7 percent, the IMF said Wednesday in its online IMF Survey Magazine.

PPPs are the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. They are used as a first step in making comparisons of the relative sizes of countries.

A World Bank-led project, the International Comparison Program, released in December preliminary PPP estimates for the 2005 benchmark year.

The IMF said downward revisions for PPP-based GDP of two of the world's fastest-growing economies, China and India, were mainly responsible for the overall reduction of global growth estimates.

For 2007, China's share of global output is now estimated at 10.9 percent, down from 15.8 percent, and India's share has declined to 4.6 percent from 6.4 percent.

Meanwhile, the US share has been revised up to 21.4 percent from 19.3 percent.

The new PPP calculations will be used to prepare the January 25 WEO update, which coincides with the World Economic Forum in Davos, Switzerland.

IMF managing director Dominique Strauss-Kahn will participate in a panel discussion at the annual meeting of leading politicians and business leaders at the alpine ski resort, the spokesman said.

U.S. recession "not a sure thing": Feldstein

WASHINGTON (Reuters) - The probability of the U.S. economy sliding into a recession is now over 50 percent, but it is not a sure thing, National Bureau of Economic Research President Martin Feldstein said on Thursday.

"A recession in my judgment is more likely than not, but it's not a sure thing," Feldstein told a forum hosted by the Hamilton Project, an economic research group headed by former Treasury Secretary Robert Rubin.

NBER is the organization that determines when the business cycle enters recessions and recoveries.

Jobless claims fell by 15,000 last week

WASHINGTON (Reuters) - The number of U.S. workers applying for unemployment aid fell unexpectedly by 15,000 last week, according to government data on Thursday that could help ease concerns the labor market was deteriorating rapidly.

Initial jobless claims for state unemployment insurance benefits fell to a seasonally adjusted 322,000 in the week ended January 5, from a slightly revised 337,000 the prior week.

Wall Street economists were expecting a slight increase in new claims to 340,000 from the originally reported 336,000 in the week ended December 29.

U.S. government bond prices slightly pared early gains after the surprise drop in claims, with the benchmark 10-year note trading 2/32 higher in price for a yield of 3.82 percent.

The four-week moving average of new claims, which irons out volatility in the week-to-week figures, fell for the second straight week, slipping to 341,000 from 344,000 the prior week.

A Labor Department analyst said there were no special factors behind the surprise decrease and noted that this time of year can be difficult to account for seasonal adjustments. "This is a real tough time of the year for us," he said.

Traditionally, there is a good bit of volatility during the period between Thanksgiving and the observance of civil rights leader Martin Luther King's birthday in mid-January.

The U.S. jobless rate rose to 5 percent last month from 4.7 percent in November, a government report showed on Friday, the largest monthly rise since October 2001, shortly after the September 11 terror attacks.

The report stirred fears the U.S. economy might be falling into a recession, if not already in one, and led financial markets to raise bets that the Federal Reserve would cut interest rates by a hefty half-percentage point at a meeting on January 29-30.

Fed Chairman Ben Bernanke could offer more insight into the likely direction of U.S. interest-rate policy in a speech at 1 p.m. (1800 GMT).

The number of people who remain on the benefit rolls after drawing an initial week of aid dropped by 52,000 to 2.70 million in the week ended December 29, the latest period these figures were available. But that number still remained close to levels reached during 2005 in the aftermath of Hurricane Katrina.

"Perhaps more important given the sharp jump in unemployment in December to 5 percent is the continuing claims series," Joseph Brusuelas, U.S. chief economist at IDEAglobal in New York, said in a research note.

"A move above 3 million is consistent with past recessions and the market will continue to monitor this data closely, as the traditional seasonal volatility works its way out of the series," said Brusuelas.

Recession fears are growing

WASHINGTON (Reuters) - Expectations for the weakest consumer spending performance in 17 years during 2008 kept the odds of a recession at nearly 40 percent, a survey of top forecasters showed on Thursday.

Panelists surveyed by the Blue Chip Economic Indicators newsletter have the odds of a recession in the next year at 38 percent, a little weaker than the 39 percent odds forecast a month ago.

But the most recent survey was taken ahead of December's grim unemployment report and the newsletter stated that growth forecasts would have been weaker if taken after release of that data.

"The January 4th news of the first decline in private sector nonfarm payrolls since July 2003 and whopping 0.3 of a percentage point jump in the unemployment rate during December no doubt caused some of our panelists to further trim their forecasts of economic growth this year and heightened speculation about the possibility of a recession," the newsletter stated.

"Whether or not the economy is already in a recession, about to enter one, or manages to muddle through without one, will only be known in the fullness of time," the newsletter wrote.

Based on the Jan 2-3 survey of economists -- taken a day ahead of the government's weak employment report that showed a huge uptick in the December unemployment rate and the weakest job growth in more than four years -- consumer spending this year is expected to grow at the weakest annual pace since 1991.

"Expected to weigh on consumer spending in 2008 are slower job and income growth, high energy costs, declining home values and if the first week of January is any indication, a weaker stock market," the newsletter wrote.

Prospects for the housing sector remain grim, with new housing construction activity expected to fall by 17 percent this year compared with 2007 levels. That's almost half the amount of housing start totals seen in 2004 and 2005.

"Combined inventories of new and existing unsold homes remain near a record high, lending standards have tightened considerably and foreclosures will likely accelerate this year as adjustable rate mortgage resets surge and the unemployment rate increases," the newsletter wrote.

Economists in the panel forecast that residential investment may continue to subtract more than a full percentage point from economic growth as measured by gross domestic product. But that drag on growth should ease considerably during the second half of the year.

Sales of autos and light trucks will see the poorest performance in a decade, the economists forecast

The outlook for business spending is a bit stronger.

Business investment is projected to grow 4.2 percent this year, just 0.1 of a point less than estimated a month ago but economists expect companies to be hampered by weaker profit growth, tighter lending and general uncertainly about the economic outlook.

Pretax corporate profits are expected to grow 1.8 percent this year, 0.6 of a point less than what was forecast a month ago and half the pace estimated in October.

"Slower consumer spending and capital investment is expected to limit manufacturing activity. Foreign goods producers will absorb some of the hit from the reduced demand, but the consensus still expects total industrial production to grow only 1.9 percent in 2008," the newsletter wrote.

The inflation picture was mixed. Panelists noted that below-trend economic growth and lower energy prices will eventually cause inflation to ease over the coming year. But at present inflation continues to creep higher with consensus forecasts for year-over-year inflation measured in the government's Consumer Price Index rising for the past three months in a row.

Goldman Sachs sees recession in 2008

NEW YORK (Reuters) - Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter.

In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent.

The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.

The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent.

Goldman strongly advises fund managers to overweight health care, consumer staples, energy and utilities. They are significantly underweight consumer discretionary, financials, industrials, materials and information technology.

The three most significant changes to their sector recommendations are the reduction in the financial sector weighting by 300 basis points to 14 percent, the information technology weighting by 400 basis points to 15 percent, and the increase in their health care weighting by 300 basis points to 17 percent, the firm said.

Their reduced allocation to financials reflects weak fundamentals and their declining weight in the S&P 500. The reduction in information technology reflects that the group has been the second-worst performing sector in both the six months leading up to a recession and during the first phase of a recession, Goldman said.

The health care weighting change reflects strong performance of the group during the six months leading up to and during the first phase of a recession in addition to an attractive valuation, Goldman said.

On Monday, Merrill Lynch economist David Rosenberg said the jump in U.S. unemployment in December confirmed that the economy was entering a recession.

UPS chief talks about recession risk

ATLANTA - The chief executive of UPS Inc. said Wednesday that the country is at increased risk of falling into a recession and it's not clear when the economy will rebound.

CEO Scott Davis, who took the helm at the world's largest shipping carrier earlier this month, told a Metro Atlanta Chamber of Commerce gathering that overall economic growth is lethargic.

"Hopefully, we'll work our way through it," Davis said.

He said he could not say for sure if the U.S. will fall into a recession, but he added, "There's more risk than there was before."

Davis did not offer any new guidance on earnings and revenue projections for Atlanta-based UPS, which moves roughly 7 percent of the country's gross domestic product each day.

UPS previously said that its growth in the fourth quarter, which included the Thanksgiving and Christmas holidays, would be its slowest in four years, due mostly to weak U.S. retail sales. UPS, also known as United Parcel Service, releases fourth-quarter and year-end results on Jan. 30.

A slowdown in the U.S. housing market and a credit crunch facing major financial institutions have caused economic observers in recent months to grow more concerned about the possibility of a recession.

Davis said that UPS' strategy of long-term growth, particularly on the international side, will not change under his leadership.

Increasing competition for delivery of goods has meant the company has had to broaden its global reach and expand its business beyond small package delivery, to shipping heavy freight and providing logistics services for companies.

"We are a patient company — always looking 10, 20, 30 years down the road," Davis said.

UPS announced in October that Mike Eskew would retire at the end of 2007 after six years as CEO and more than three decades with the company. Davis was the company's chief financial officer before taking the top post.

UPS shares fell 22 cents and hit a 52-week low of $66.45 in midday trading Wednesday, 15 percent off trading highs of $78.99 during the same period.

Goldman Sachs sees US 'falling into recession'

WASHINGTON (AFP) - Investment giant Goldman Sachs said Wednesday the US economy is in recession or will soon be in a downturn  stemming from housing and credit woes.

"The recent data suggest that the US economy is falling into recession," Goldman Sachs economists said in a research note.

"We expect economic activity to contract modestly through late 2008, followed by a gradual recovery in the course of 2009."

Goldman's views came two days after Merrill Lynch said a recession was "a present-day reality" for the world's biggest economy.

Goldman Sachs said it expects the Federal Reserve to cut interest rates aggressively, bringing the federal funds rate from 4.25 percent to 2.5 percent by late 2008.

Goldman Sachs cut its 2008 growth forecast for the US to 0.8 percent from 1.8 percent, and sees a US recession during the year with gross domestic product declining in the second and third quarters.

A recession is generally defined as two consecutive quarters of declining economic output.

Bush says he's watching economy closely

WASHINGTON - President Bush said Tuesday that he is watching very carefully to see if the struggling U.S. economy needs a short-term boost from the federal government.

"We're listening to different ideas about what may or may not need to happen," he said. "We'll work through this. We'll work through this period of time."

He wouldn't comment on any specific ideas he is considering, such as tax cuts aimed at lessening the chance of a recession. "We'll look at all different options."

On Monday, Bush talked about recent indicators that have been "increasingly mixed," a new recognition of the challenges now facing the economy, primarily resulting from a severe housing crisis. Previous Bush statements have paid attention to the financial fears of many American families and the effects of the housing slump, but focused on what he calls the strong fundamentals underpinning the economy.

"It's going to take awhile to work through the downturn," he said Tuesday of the housing crisis. He spoke in response to a question, during a Rose Garden event on Iraq.

Bush regards his State of the Union address to Congress at the end of the month and the release of his new budget proposal shortly after as a sort of deadline for making the call about whether to propose a stimulus package. Aides say he wants to analyze more economic data before making a final decision.

On Friday, the government reported that hiring practically stalled in December, driving the nation's unemployment rate up to a two-year high of 5 percent. With such reports fanning fears of a recession and more Americans growing anxious, Bush has taken to talking about the economy often.

As before, he spoke on Tuesday of his confidence in the American economic system and the ability of it — and his administration — to weather even severe shocks.

"I'm optimistic, as I've seen this economy, you know, go through periods of uncertainty," the president said. "I like the fundamentals, they look strong, but there are new signals that should cause concern. And one of the signals is the fact that the housing market is soft."

On Capitol Hill, Democrats promised action on the economy.

"Congress is committed to early action to stimulate and strengthen the economy on behalf of the majority of Americans who know the economy is headed in the wrong direction," said House Speaker Nancy Pelosi, D-Calif. "We will work to make sure this effort is bipartisan and urge the president to join us."

No decisions have been made on the size and shape of any congressional economic package, though speculation mounted that it could include a tax rebate similar to the $300-$600 rebate checks sent out in 2001 as part of Bush's big tax bill. At the time, Democrats were more enthusiastic about the idea than many Republicans.

Earlier Tuesday, Treasury Secretary Henry Paulson said the administration was exploring what would be a significant expansion of the program to help at-risk mortgage holders.

Paulson, in an interview on CNBC, said the administration was involved in discussions with the mortgage industry to expand a current program to freeze adjustable rate mortgages for five years to include borrowers of loans at prime rates. Currently, the rate freeze only covers a much smaller segment of adjustable rate loans, those made to subprime borrowers. Those are borrowers with weak credit histories.

Paulson did not provide any details on when this expansion might go forward.

On Monday, Paulson had said in a speech in New York that the current housing correction was "inevitable and necessary" following five years of an unsustainable boom which saw sales and home prices hit record levels.