Why US economy is flashing conflicting signals
By CHRISTOPHER S. RUGABER
The Associated Press | October 01,2012
WASHINGTON — Anyone puzzled by the most recent U.S. economic data has reason for feeling so: The numbers sketch a sometimes contradictory picture of the economy.
We’ve learned that:
Consumers are more confident but aren’t spending much. Fewer people are losing jobs, but not many are being hired. Home and stock prices are up, but workers’ pay is trailing inflation. Auto sales have jumped, but manufacturing is faltering.
This is what an economy stuck in a slow-growth rut can look like, and it’s a focal point of the presidential campaign. The U.S. economy grew at a scant 1.3 percent annual rate in the April-June quarter — too weak to reduce high unemployment. And most economists foresee little if any improvement the rest of the year.
Many Americans are reducing debt loads instead of spending freely. Builders are borrowing less and constructing homes at a modest pace. Businesses are being cautious about hiring and expanding.
In the long run, reduced debts and rising home and stock prices will help rebuild household wealth, boost consumer spending and spur job growth. But it’s taking time.
“The U.S. outlook could best be described as one of near-term weakness and long-term strength,” says Chris Jones, an economist at TD Bank.
Here are some of the mixed signals recent economic reports have sent with the election now five weeks away:
After plunging when the housing bubble burst, home prices are finally rising steadily, according to the Standard & Poor’s/Case-Shiller index. The index rose in July compared with a year earlier. That was the second straight year-over-year gain. Still, the annual pace of new-home sales dipped in August from a two-year high in July. At the same time, sales were nearly 28 percent above the level a year earlier.
The Good News: For most Americans, a home is their most valuable asset. As its value increases, homeowners grow wealthier and typically feel more confident. That tends to spark more consumer spending — the U.S. economy’s main fuel. Rising prices also lead more people to sell homes, further energizing the housing market. More sales would likely spur further homebuilding.
The Bad News: Home construction now plays too small a role in the economy to provide much lift. It made up only 2.4 percent of the economy in the April-June quarter. That compares with a peak of 6.3 percent at the end of 2005 and a longer-run average of just under 5 percent. “Housing would therefore need to be on steroids to provide a major boost to growth,” Paul Dales, an economist at Capital Economics, said in a note to clients.
Looking Ahead: Record-low mortgage rates are likely to keep homes affordable. The Federal Reserve’s decision to spend $40 billion on mortgage bonds each month until the recovery accelerates should keep rates low and increase home sales. Rising builder confidence also suggests that construction will keep growing. But many Americans lack the credit to qualify for a mortgage. Or they can’t afford the larger down payments now required.
n CONSUMER CONFIDENCE
Americans are feeling better about the economy despite chronically weak job gains and pay levels that lag inflation. The private Conference Board’s index of consumer confidence is at a seven-month peak. A survey of consumer sentiment by the University of Michigan has reached its second-highest point in nearly five years. Both surveys found that consumers are lukewarm about current economic conditions but more optimistic about the future.
The Good News: When consumers are confident, they’re generally more likely to spend. Both surveys also found that consumers expect hiring to pick up.
The Bad News: You can’t spend confidence. Rising confidence doesn’t always lead to higher spending. And when an economy is healthy, consumer confidence is usually much higher than it is now.
Looking Ahead: Without more hiring and stronger pay raises, the recent gains in consumer confidence might not last.
n BUSINESS CONFIDENCE
Businesses appear to be less confident than consumers. A survey of chief executives of large U.S. companies has found their outlook to be at its most pessimistic level since the fall of 2009 — just after the recession officially ended. Orders for long-lasting factory goods plummeted in August. In part, that reflects Europe’s financial and economic crises, which have reduced demand for U.S. exports. Six European countries are in recession. More are expected to follow.
The Good News: A plunge in orders for commercial aircraft caused most of the drop in demand for factory goods. That category of orders fluctuates from month to month. It will likely rebound. In the meantime, orders that reflect business investment plans are up.
The Bad News: Business spending on equipment and software has been a big source of economic growth in recent years. Orders for such goods have dropped sharply in the past three months, threatening to further slow U.S. growth.
Looking Ahead: Many corporate executives lack confidence in part because of fears that the U.S. economy will fall off a “fiscal cliff” early next year. That’s when tax increases and deep spending cuts will take effect unless Congress reaches a budget deal. Those changes could throw the economy into recession. But business spending and hiring could pick up if the budget issues are resolved.
n CONSUMER SPENDING
Americans spent more in August. But that was mainly because they had to pay more for gas and some other items. Adjusted for inflation, consumer spending barely rose in August. That’s been true for most of this year.
The Good News: Americans were willing to spend more, even if much of it went in the gas tank. Consumers were even willing to save less in order to spend more. That’s another sign of confidence.
The Bad News: Income failed to keep up with inflation, which is why consumers had to dip into savings. That isn’t sustainable for very long. The national average retail price for gas is $3.79 a gallon, nearly 50 cents higher than in early July and a record for late September. If gas prices stay high, Americans would have less to spend on other goods, from cars and furniture to electronics and vacations, that fuel economic growth.
Looking Ahead: Spending will likely grow sluggishly without bigger increases in workers’ pay and perhaps a moderation in gas prices.
The number of people applying for unemployment benefits fell sharply in the week ending Sept. 22. That suggests that the weak job market could strengthen. Employers added just 96,000 jobs in August — barely enough to keep up with the growth of the working-age population. The unemployment rate did fall to 8.1 percent from 8.3 percent. But that was because many people gave up looking for work, so they were no longer counted as unemployed.
The Good News: Weekly applications for unemployment benefits track layoffs. So the drop indicates that companies aren’t laying off many people.
The Bad News: Falling layoffs aren’t translating into healthy job growth. The pace of layoffs in July was the lowest in a decade — even lower than when the economy was booming. Yet employers are hiring at a subpar pace.
Looking Ahead: The September jobs report will come out Friday. Economists think the economy will show a modest gain of about 100,000 jobs. Given employers’ anxiety about the U.S. fiscal cliff and Europe’s economic crisis, few expect a significant pickup in hiring soon.