Economy's vital signs sputter

Faltering recovery raises fears that we're headed for Round 2 of recession.

Tribune Washington BureauJuly 2, 2010 

  • 472,000

    New claims for unemployment benefits last week, a surge of 13,000 over the week before.

    30 percent

    Decline in the number of buyers who signed contracts to purchase homes in May, compared to April.

    The Associated Press

— A fresh batch of weak economic reports Thursday heightened concerns about the staying power of the fledgling recovery, with more grim news expected today when the government releases the latest in a series of monthly unemployment reports that have been less than buoyant.

Construction spending declined and pending home sales plunged at a record pace in May - reflecting a larger-than-expected fallout from the expiration of the federal homebuyer tax credit.

A key index measuring factory activity also suggested that manufacturing, which has been leading the recovery, may be losing momentum. In fact, car sales dropped in June.

And the government's weekly tally of new jobless claims indicated that more people are filing for unemployment benefits.

Thursday's reports - while only snapshots of particular segments of the nation's vast and complex 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.

Taken together, the fresh evidence that the global economy remains troubled has pounded financial markets and increased fears that the American economy could slip back into recession.

"The general tone has darkened over the past month," said Sophia Koropeckyj, an analyst at Moody's, which this week raised its estimate of the probability of a double-dip recession to one-third from one-quarter.

Keeping hope alive

Most economists still see a double-dip as a remote possibility, clinging to forecasts that the economy will muddle along at a modest pace over the next several quarters.

Earlier this year, a series of strong economic reports raised optimism, but more recently indicators have been more mixed, souring investors and others expecting a stronger recovery, said Ken Matheny, a senior economist at Macroeconomic Advisers, a forecasting firm based in St. Louis. But that hasn't altered the fundamental outlook for the economy, he said.

"It hasn't shaken our belief for a solid, sustainable recovery," Matheny said, noting that business investment remained solid and consumer spending has held up fairly well.

Others were much more circumspect - and another poor jobs report will further erode their confidence.

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. Excluding that, private-sector employers are projected to have added 110,000 jobs last month after a disappointing increase of just 41,000 in May. The unemployment rate is expected to tick up a fraction to 9.8 percent.

Roughly 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; weaker economic growth could set back the chances of achieving even that modest goal.

Losing steam

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 percent 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 as the nation heads into the second half of 2010 with government support fading and some other key engines of the economy cooling or idle.

One major obstacle is the persistent weakness in the nation's depressed housing market.

The reports Thursday renewed fears among economists that the housing market could be headed for more trouble now that a popular tax credit for homebuyers is no longer fueling the real estate market.

Purchase contracts for previously owned U.S. homes plunged 30 percent in May as the deadline to qualify for the popular home-buyer tax credit expired, according to an industry index.

The National Association of Realtors' pending home sales index, a forward-looking indicator based on the number of purchase contracts signed in the U.S., dropped to 77.6 in May from 110.9 in April. It was the lowest point for the index since it was created in 2001, the first of five consecutive years of record sales for previously owned homes. An index of 100 is equal to the average level of contract activity in 2001.

Deadline: August

Lawrence Yun, chief economist for the Realtors group, downplayed the May weakness, saying it was expected. June and July's numbers are also likely to show continued sluggishness, given the lack of stimulus. If the index does not begin increasing by August, however, then the housing market could be headed for a more prolonged decline, Yun said.

"We need to see a steady rise in that figure," Yun said.

"The housing market just can't stay on stimulus medicine forever, so it had to end," Yun said. "What is really needed is jobs."

Steady job creation is necessary to give people both the money necessary to purchase a home as well as lend confidence to potential buyers already employed that they will not lose their jobs.

But job growth isn't likely to be robust. Keith Hembre, an economist at First American Funds in Minneapolis, sees the economy growing at a sluggish 1 percent to 2 percent 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."

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