By Neil Irwin
Washington Post Staff Writer
Friday, July 24, 2009
Companies that a few months ago were too fearful even to project their future earnings are now seeing glimmers of hope in the year ahead. The rate of home sales has risen for three straight months. And the number of people drawing unemployment insurance benefits has fallen back to April levels, having receded for the third straight week.
All those recent signals sent the stock market surging Thursday as investors sensed that the recession could be in its waning days. Many suspect that even if no recovery is imminent, the steep economic decline has either already ended or will soon.
That confidence drove the stock market, as measured by the Standard & Poor's 500-stock index, up 2.3 percent Thursday -- continuing a rally that has driven the broad measure up 44 percent since March 9 and 11 percent in the past two weeks. The Dow Jones industrial average has gained 39 percent since March 9 and closed above 9000 for the first time since January. European markets rose by a similar amount on Thursday, and Asian markets opened up in early trading Friday.
"It's a lot easier to argue now that the recession is fading," said Joel L. Naroff, president of Naroff Economic Advisors. "We can be more comfortable now that the recession is winding down and should be over within the next few months."
The cheery mood on Wall Street notwithstanding, the latest data are hardly evidence of a new boom on the way.
Sales of existing homes rose 3.6 percent in June, the National Association of Realtors reported on Thursday, to an annual rate of 4.9 million homes sold. While that level is very low by historical standards, it is the third straight month of increase -- a sign that housing may no longer be a net drain on economic growth. "One month is nice, two months opens eyes, and three months is a trend," said Naroff.
Home prices are still falling, however, and it could take some time for the bloated inventories of homes for sale -- 3.8 million of them, a 9.4-month supply -- to come back into a more normal range. A six-month supply would be typical.
Similarly, the job market remains in terrible shape, but the pace of layoffs appears to be abating. The Labor Department said Thursday that 6.2 million Americans were receiving unemployment insurance benefits, continuing a decline in that measure of joblessness. Some 554,000 people filed new claims for jobless benefits, high by any conventional standard but remaining below 600,000 for the third straight week and down substantially from the 674,000 such filings in the last week of March.
The continued weakness in the labor market is among the greatest continuing threats to the economy, analysts said, an argument that Federal Reserve Chairman Ben S. Bernanke made in congressional testimony this week. Even as companies begin cranking up production to replace depleted inventories, Americans who are out of work -- or fear they may become so -- could be disinclined to spend money.
"What we're seeing is an abatement of bad news rather than an emergence of good news," said Diane C. Swonk, chief economist at Mesirow Financial. "The economy is stabilizing at a low level, and demand from consumers is still weak."
Also among the day's good news: Ford Motor, the lone U.S. auto manufacturer to have avoided bankruptcy and a government bailout, reported a $2.3 billion profit in the April-through-June quarter. But that was driven by a gain from buying back its own debt at a discount. Even excluding one-time items, the company experienced a lower loss than analysts expected, as it slashed expenses and gained sales relative to competitors. The company lost $638 million excluding those items, less than half what analysts expected.
"We believe [the economy is] going to come back," Ford chief executive Alan Mulally said in a conference call with investors Thursday. "It's going to start to come back led by the [gross domestic product] in the United States in the third quarter, and pick up a little momentum in the fourth quarter and next year. But clearly, this is still a very fragile economy."
Manufacturing giant 3M raised its earnings forecast for the rest of the year after issuing second-quarter results on Thursday that eclipsed analysts' projections. The company said it expects retailers to begin restocking their shelves after spending the past several months depleting a backlog of inventory, but chief executive George W. Buckley cautioned that the glimmers of recovery could merely be a "false dawn."
After the stock market closed Thursday afternoon, several companies announced second-quarter earnings that showed how thoroughly the recession is damaging the nation's corporate titans. Microsoft's earnings fell 29 percent compared with a year earlier, American Express's earnings fell 48 percent as it set aside more money for credit losses, and Amazon said its profit fell 10 percent.
"We're getting more accumulation of evidence that various sectors are stabilizing," said David Wyss, chief economist at Standard & Poor's. "We're not in recovery, but we're bouncing around in the bottom part of the business cycle."