Like a tired heavyweight boxer receiving blows to the head, some crushing economic reports released this past week kept the economy and housing markets in retreat and further away from recovery. The first blow was the December new home sales release which saw new home sales plummet 14.7 percent to an unimagi­nable 333,000 annualized units. This pace of sales is the lowest in 45 years, bringing the months’ supply to a cyclical high of 12.9. The report is particularly disap­pointing given that mortgage rates fell in December. It appears that job losses and shattered consumer confi­dence are keeping households from purchasing new homes. It also appears that households are favoring existing homes over new homes because of the deeper discounts associated with the existing supply due to heavy foreclosure activity.

A second blow was the release of the advanced estimate for GDP which reported that the economy contracted 3.8 percent in the fourth quarter of last year. Although the contraction was better than expected (we expected a 5 percent contraction), our economy experienced the sharpest contraction in the fourth quarter since the first quarter of 1982. Consumer spending fell by 3.52 per­cent, while business investment and residential con­struction declined as well. As expected, trade flows and government spending added slightly to GDP growth for the quarter. A building of inventories also added to GDP for the quarter, but higher inventory levels do not bode well for future economic activity because com­panies are expected to draw down their inventories in response to demand for goods and services rather than produce additional goods and services.

The data offer little encouragement for a recovery any­time soon. Consumer spending, which accounts for about 2/3 of GDP, is in a serious retreat. Job losses, falling confidence, and tight credit have inhibited con­sumer spending in a meaningful manner. Similarly, businesses are investing less in plant and equipment. It is likely that GDP contracted by as much or more in the first quarter of this year, compared to the fourth quarter of last year.

The Federal Reserve’s Federal Open Market Commit­tee, FOMC, met this past week and decided to continue their cur­rent accommodative posture in the markets, leaving the fFderal funds rate targeted within the 0 to 0.25 percent range. Monetary policy is very easy and the Fed is com­mitted to providing the necessary funds to the banking system to keep credit flowing.

The Obama stimulus package was passed by the House of Representatives this past week and all eyes now turn towards the Senate which is considering their own stimulus package. Both the House and Senate packages are a mix of government spending and tax cuts/benefits. Unfortunately, there are few direct housing stimulus programs included in either of the packages.

In other economic news, the Conference Board index of consumer confidence fell slightly to a record low of 37.7 in January. Consumer confidence has plunged 40 percent since it registered 61.4 in September of last year. Consumer spending will continue to be weak in future months until households regain their confidence. Job­less claims increased by 3,000 to 588,000 for the week ending January 24. Claims are now at levels before the holiday season (early December). The high level of job­less claims reflects a deteriorating labor market. Dura­ble goods orders fell 2.6 percent in December, follow­ing a 3.7 percent decline in November. Both shipments and new orders fell in December, reflecting a very weak manufacturing sector as firms cut back on production.

Mortgage applications for both refinancings and pur­chases declined despite favorable mortgage rates for the week ending January 23. The purchase index dropped 2.9 percent to 294.3, while the refinance in­dex dropped 48 percent to 3,373.9. It appears that the surge in refinance applications was short-lived in response to favorable mortgage rates. The refi index is now 54 percent below its cyclical peak of 7,414.1 posted for the week ending January 9. The decline in the purchase index is particularly troubling given that mortgage rates were relatively unchanged for the week. The current pace of purchase applications com­bined with a relatively high fallout rate does not bode well for future home purchases.