Conflicting housing, factory data show fragility of economic recovery
Wednesday, January 6, 2010
The rebound in manufacturing showed further signs of promise for the economy in the coming year, according to government data released Tuesday, even as housing, another key driver of the country's nascent recovery, offered new cause for worry.
Orders at American factories increased in November by more than analysts had expected, the latest evidence that the manufacturing recovery is accelerating. The industrial sector has been ramping up production since July as demand for all sorts of goods has revived and companies have had to crank up assembly lines to replace depleted inventories.
But pending home sales plummeted in November, suggesting the housing sector could weaken as the impact of government policies to support the industry fades. Although housing data are notoriously volatile, the new figures raise the possibility that the sector -- where the economic downturn of the past two years started -- could have further to fall.
The conflicting signs show the fragility of the expansion as 2010 gets underway. Even positive economic news has come with caveats, and the recovery remains too weak to significantly chip away at the highest jobless rate in a generation.
Some analysts project that unemployment, running at more than 10 percent, could put even more pressure on the housing market, triggering yet another wave of home foreclosures as more families fall behind on their mortgages.
So far, housing and manufacturing have been two of the main engines of recovery, along with government spending. The last is also a source of worry for economic forecasters, who see it flagging as federal stimulus spending comes to an end.
So major questions are hanging over the new year, despite a growing roll of encouraging signs. Analysts now say they believe that the economy grew at a healthy clip in the final three months of 2009, with many forecasters concluding that gross domestic product rose at a rate of 4 percent or faster. One leading firm, Macroeconomic Advisers, upgraded its estimate to 4.9 percent Tuesday.
Some analysts say the nation added jobs in December, which would be the first month of job growth in two years. The Labor Department is set to release monthly employment data Friday.
The Commerce Department said Tuesday that new orders for factory goods rose 1.1 percent in November, better than the 0.8 percent that analysts had expected on average. That comes on top of survey data Monday indicating that manufacturers continued expanding in December.
Separate reports from major automakers Tuesday showed that consumers were continuing to buy cars at a faster clip, with the annualized rate of U.S. auto sales climbing to 11.2 million in December. But the industry continues to be roiled by the downsizing of consumer ambitions. Before the recession, auto sales topped 16 million annually, and they aren't expected by industry analysts to return to that level anytime soon.
"It was a challenging and very volatile year," said Ken Czubay, Ford's vice president of U.S. sales and marketing. "For 2010, I'm leaving my seat belt on."
Economic conditions have proved particularly troubling for General Motors and Chrysler, the two automakers rescued by the federal government this summer. Chrysler's sales were down 4 percent from December 2008, and General Motors' sales fell 6 percent. Ford recorded a 33 percent jump in sales for the month.
Positive economic indicators have led some forecasters to become increasingly optimistic, but the housing report showed that this sector could undermine the renewed hope. The sharp slide in pending home sales reflected an end to the feverish activity of homebuyers who, in previous months, had been racing to close deals before the initial Nov. 30 expiration date of a tax credit mainly aimed at first-time purchasers.
Congress expanded and extended the tax credit, and homebuyers now have until April 30 to have a contract in place to qualify for it. First-time buyers are eligible for up to $8,000, while repeat buyers can qualify for a $6,500 credit.
"The good news is: On the factory front, we're looking at a much stronger fourth quarter," said Scott Anderson, senior economist at Wells Fargo. "But my worse fears are that the housing market has been propped up by the first-time home-buyer credit and that housing will not be getting the same boost as the year moves forward."
The pending-home-sales index fell in November for the first time in 10 months, sliding 16 percent compared with the previous month, according to the National Association of Realtors, an industry group. Economists had expected a decline in the index, which records when buyers have signed contracts. But the drop was steeper than they forecast and the largest decline since 2001.
The housing market had shown tentative signs of improvement starting in the summer but has stumbled recently, including an 11 percent dip in new-home sales in November. Momentum could fade further as temporary measures propping up the market -- including measures to keep mortgage rates near historic lows and the tax credits for home purchases -- expire this year, economists say. Moody's Economy.com has forecast that home prices will dip 10 percent this year and that foreclosures will peak at nearly 2 million.
The decline in housing activity was felt nationwide but was most pronounced in the Northeast and the Midwest, where the index fell 26 percent. The index fell 15 percent in the South, which includes the Washington region, and 3 percent in the West.
"The pending-home-sales numbers today imply a substantial degree of the strength we have seen in recent months was probably due to the tax credit, which is something that's not going to be around for a long period of time and to some degree should be viewed as a temporary effect," said Abiel Reinhart, an economist for J.P. Morgan Chase.
The Realtors have estimated that 2.4 million first-time and repeat homebuyers will take advantage of the tax credit; 2 million already have.
Despite the dip, the pending-home-sales index was still 15.5 percent higher than in November 2008. And the spring buying season should bring another surge in activity as buyers rush to take advantage of the tax credit, said Lawrence Yun, the Realtors' chief economist.
A rebound in the larger economy could help boost the housing market, said Mike Larson, a housing analyst with Weiss Research. The rate of job losses has already started to decline, he said. "The stabilization of the labor market is a heck of a lot more important than the temporary juicing of the housing market" with the tax credit, Larson said.
But if sales do not begin to show improvement by February or March, "that's a problematic sign," Larson said. "But I don't really anticipate that."