By Don Lee and Alejandro Lazo
RISMEDIA, July 6, 2010—(MCT)—A fresh batch of weak economic news heightened concerns about the staying power of the fledgling recovery, with more uninspiring news expected when the government reports on the May job market.
The number of pending home sales plunged 30% in May from April, to the lowest level since at least 2001, an industry group reported recently, reflecting a larger-than-expected fallout from the expiration of the federal tax credit for home buyers.
A recently released closely watched index of factory activity suggested that manufacturing, which has been leading the economic recovery, may be losing momentum. In other reports that were more downbeat than expected, U.S. car sales dropped in June from May’s level, and first-time jobless claims increased last week from the week before.
The recent reports—although only snapshots of segments of the country’s vast economy—came against a background of other discouraging news from abroad, including Europe’s continuing debt troubles and signs that even China’s normally fast-growing economy may be slowing down.
The economic worries have pounded stock prices. The market’s slide, in turn, has stoked anxiety about the economy, because it suggests that some investors increasingly fear the U.S. will slip back into a recession. The Dow industrials fell last week for the eighth time in nine trading days, closing at its lowest level since October.
“The general tone has darkened over the past month,” said Sophia Koropeckyj, an analyst at Moody’s Economy.com, which recently estimated the odds of a return to recession at 1 in 3, up from the previous estimate of 1 in 4. Most economists still see a “double dip” as a remote possibility, clinging to forecasts that the economy will muddle along at a modest pace for several quarters. After a series of strong economic data early this year, recent reports have been more mixed, but that hasn’t altered the fundamental outlook for the economy, said Ken Matheny, a senior economist at Macroeconomic Advisers, a forecasting firm based in St. Louis. “It hasn’t shaken our belief for a solid, sustainable recovery,” he said, noting that business investment remained solid and consumer spending was holding up fairly well.
On average, analysts are expecting U.S. payrolls to show an overall decline of 130,000 jobs for June because of layoffs of temporary census workers. Private-sector employers are projected to have added 110,000 jobs last month after a disappointing increase of 41,000 in May. The unemployment rate is expected to tick up a fraction to 9.8%.
About 125,000 new jobs are needed every month to keep pace with the population growth and keep the unemployment rate from rising. Many forecasters don’t see the economy generating much more than that for the rest of this year.
By all accounts, the broader economy has been recovering since last summer, powered by government stimulus funds and an upturn in manufacturing. But the rate of growth has fallen from 5.6% in the fourth quarter of last year to half that pace in the first three months of this year.
And momentum seems to be waning with government support for the economy fading and other key growth engines cooling or idle.
One major obstacle is the persistent weakness in the depressed housing market.
The reports renewed fears among economists that the housing market could be headed for more trouble now that the home-buyer tax credit is no longer fueling the real estate market.
The National Association of Realtors’ pending home sales index, based on the number of contracts signed to buy previously owned homes in the U.S., dropped to 77.6 in May from 110.9 in April. It was the lowest point since the index was created in 2001.
Lawrence Yun, the trade group’s chief economist, said June and July’s numbers were also likely to be sluggish. But if pending sales don’t begin rising by August, the housing market could be headed for a more prolonged decline, he said.
“We need to see a steady rise in that figure,” Yun said.
To a large extent, the housing market depends on the job market—because to buy a home, people need to have money coming in and the confidence that they won’t lose that income. “The housing market just can’t stay on stimulus medicine forever,” Yun said. “What is really needed is jobs.”
But job growth is unlikely to be robust. Keith Hembre, an economist at First American Funds in Minneapolis, sees the economy growing at a sluggish 1-2% annual rate over the next four quarters.
At that pace, he said, “it means the unemployment rate isn’t going down anytime soon, and it’s going to be a tough environment to get compensation gains.”
Manufacturing has been a big part of the job market’s recovery this year, along with the government and temporary-staffing sectors. But the Institute for Supply Management’s factory-sector index fell more than expected in June, suggesting Europe’s troubles may now be weighing on U.S. exports.
The construction sector, meanwhile, remains weak. Spending on all types of building declined 0.2% in May from April, and was down 8% from May 2009, the government said.
On Wall Street, where the Dow is down 13% since late April, there is anxiety about the next report on jobs, said investment strategist David Dietze at Point View Financial Services in Summit, N.J. “Everyone is concerned that the payroll number is going to be ugly,” he said.
The stock market also has been spooked by investors’ rush in recent months into the classic haven of U.S. Treasury bonds. The market yield, or interest rate, on the 10-year Treasury note–a benchmark for mortgages and other consumer rates—has plunged to 2.92%, its lowest level in more than a year, from nearly 4% in early April.
Investors’ willingness to lock up their money in bonds at such low rates typically is a sign that they expect the economy to slow sharply.
(c) 2010, Tribune Co.
Distributed by McClatchy-Tribune Information Services.
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