Two sets of appalling data signalled that the worst may be yet to come for the American economy, increasing expectations that the US central bank will slash interest rates today.

Statistics published yesterday showed the worst level of consumer confidence since records began in 1967 and the sharpest annual fall in urban house prices on record. Traders banked on at least a half-percentage point interest rate cut today, which would reduce the cost of borrowing to 1 per cent.

Hopes of a cut fuelled a huge rally on Wall Street, with the Dow Jones industrial average bouncing 10 per cent.

A rate cut could not be more timely. According to the S&P Case-Shiller index - widely seen as the most authoritative measure of American residential property values - house prices across the 20 cities surveyed fell by 16.6 per cent in August compared with the same period the year before.

The fall is the steepest on record, with Las Vegas, Miami, Phoenix and San Francisco, among others, suffering declines of between 25 per cent and 30 per cent. Economists interpreting the data reckoned that the American housing slump is only half way through with another year to run before there is any glimmer of recovery. August prices slipped 1.1 per cent compared with July, marking five months of uninterrupted declines for the cities surveyed.

At the same time, US consumer confidence in October slumped to its lowest for 41 years. The drop - expressed as an index put together by the US Conference Board - measures how optimistic Americans feel about their finances. It was a far bigger decline than Wall Street had expected. The index fell to 38, down from a revised 61.4 in September and significantly below analysts’ expectations of 52.

Together, the two pieces of data make startling reading. The consumer confidence figure spells gloom for spending, the linchpin of the American economy, accounting for 70 per cent of growth.

Ian Shepherdson, chief US economist at High Frequency Economics, described the consumer confidence figures as extraordinarily awful. Americans have all but stopped spending on discretionary items such as cars because they are scared of losing their jobs and anxious about the declining value of their homes.

More than 460,000 a week are losing their job, with about 6.1 per cent of the workforce now unemployed.

Confidence has also been damaged by the 28 per cent slide in US stock markets over the past two months as the banking system seized up. The fall on equity markets has hit the value of pension pots and investments. Worse, economists are forecasting continued double-digit declines for the US housing market for at least another year.

Dimitry Fleming, US economist at ING, the Dutch bank, said: “Despite a reduction in the number of homes for sale, supply is still enormous. We expect no end to the price declines till end 2009.” The property slump sits at the core of the American financial crisis. As house prices continue to fall, default rates on mortgage repayments rise and force lenders to write off more bad debt. In turn, the weakening mortgage portfolios held by the banks weigh down their share prices and limit their ability to raise more money.

The main reason house prices are continuing to slide is that there is very large supply of unsold homes, which depresses values and clogs up the market as a whole. In a healthy market, there is approximately six months' oversupply but in the current market there is at least a one-year stock of unsold properties.

House price falls

Monthly* Yearly**

San Francisco -3.5% -27.3%

Phoenix -2.9% -30.7%

Las Vegas -2.4% -30.6%

San Diego -2.3% -25.8%

Los Angeles -1.8% -26.7%

Miami -1.8% -28.1%

Portland -1.3% -7.6%

Minneapolis -1.0% -13.8%

Detroit -0.8% -17.2%

*Aug 2008 v July 2008

**Aug 2008 v Aug 2007

Source: S&P Case-Shiller House Price Index

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