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ROBERT SIEGEL, host:

There was some more bad economic news this morning. New home sales fell 26 percent last year; that's the biggest drop on record. Some economists say this is yet another sign the U.S. economy is headed for a recession. But here's a paradox. When the stock market heard the news on housing, it went up. The Dow Jones closed more than 170 points up on the day.

NPR's Adam Davidson joins us from New York to make sense of that confusing picture.

And, Adam, let's start with something basic. Why is it that new home sales number is so important? How does it affect the rest of us who aren't in the business of selling homes?

ADAM DAVIDSON: I was thinking earlier today how to think about new home sales, and I imagined an imaginary neighborhood. Let's say there's a guy named Arnold(ph) and his house is a little small, he wants to move. Well, what we learned today is he didn't move. He didn't buy a new house. And that actually is bad news for the rest of us. Because that means first of all, Arnold is probably pretty pessimistic about the economy. Maybe he lost his job or he's not making as much. It also means he's not going to buy carpeting, he's not going to buy a new fridge or a new stove. He's not going to spend money that will stimulate our economy. This is the fiscal stimulus thing we keep hearing about.

SIEGEL: Mm-hmm.

DAVIDSON: So that is bad news for us. There's a second person, let's call her Betty(ph).

SIEGEL: Okay.

DAVIDSON: Betty is the one who was going to sell her home to Arnold, and since Betty didn't sell the home, she didn't make money. That's bad news. But there's a third person, let's call him Claudio(ph). He lives down the block from Arnold and Betty. He had no intention of selling his home. He loves his home. But he's affected, too, because what he learns is that when Arnold doesn't buy Betty's home, when there are fewer people buying homes, the price of his home, the value does not go up. In fact, it might go down. And Claudio uses the value of his home, he gets a loan from the bank against the value of his home and that funds him buying TVs, buying a new car, taking his wife on vacation.

So Arnold is sad. Betty is sad. But Claudio is sad, too, and there are a lot more Claudios out there who are affected.

SIEGEL: So it's a bad day for Arnold, Betty and Claudio. Why, then, should those investors Durwood(ph) and Eleanor(ph), why would they see the stock market go up in response to the bad news for Arnold, Betty and Claudio?

DAVIDSON: Well, Durwood and Eleanor are looking at a fifth, sixth guy - I forgot where we're up to, Ben - Ben Bernanke. And what they realize is that all this bad news about Arnold, Betty and Claudio is bad news from last year. This data is a month old.

So what they know is Ben Bernanke is looking at this and thinking, wow, the economy really was doing poorly even though I had a surprise interest rate cut last week, a dramatic move, I might do that again this week. He's meeting tomorrow with the Federal Open Markets Committee, these are the people who set that benchmark Fed funds rate. And now, Durwood and Eleanor, the investors, are thinking that he is going to lower interest rates again. Maybe half a percentage point, maybe three-quarters of a percentage point, very big moves. And that means there's going to be a lot more cash out there, companies are going to be able borrow and spend more. And that means stock prices might continue to rise.

SIEGEL: Yes, Ben, of course, is at the Fed, which begins with F. This is a busy week for financial information. Every day we're getting some new data here. What else will we learn this week after the housing numbers?

DAVIDSON: It's possible that by Friday, we will have a much better picture of how this economy is doing. This might be a pivotal week. We're going to know a lot more about employment, how many people are working, how much money they're making, how they're spending that money. That is crucial information. We're obviously going to find out what Ben decides, and we're going to get consumer confidence numbers, which will give us a sense of how all these people are feeling about the economy, which gives us a sense of how much they're going to be spending next week and the week after that.

SIEGEL: Adam Davidson, thank you very much for talking with us.

DAVIDSON: Thank you so much, Robert.

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