US economy looks weaker

Friday, July 27, 2012    

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WASHINGTON — Businesses placed fewer orders for most long-lasting manufactured goods in June, suggesting many are losing confidence in the slumping US economy.

The housing recovery also lost some momentum last month as fewer Americans signed contracts to buy homes. A third report Thursday showed applications for unemployment benefits plunged last week — normally a good sign. But economists quickly dismissed the decline, saying fewer temporary auto layoffs distorted the figure.

The latest data added to worries that growth in the April-June quarter could be sharply lower than the start of the year. The government will issue its first of three estimates for second-quarter growth on Friday.

"It looks like the corporate sector is starting to lose confidence in the economy," said Ethan Harris, co-director of global economics at Bank of America Merrill Lynch, said.

The most alarming sign Thursday was a report from the Commerce Department on business orders for durable goods, items expected to last at least three years.

While overall orders rose 1.6 per cent in June from May, the increase was driven mostly by a surge in volatile aircraft orders.

When excluding aircraft and other transportation equipment, orders fell 1.1 per cent — the third decline in four months. And orders for so-called core capital goods, which indicate business investment plans, dropped 1.4 per cent, also the third decline in four months.

Businesses placed fewer orders for industrial machinery, computers, and autos in June.

Manufacturing has helped drive growth since the recession ended three years ago. But it has slowed in recent months, along with the broader economy.

The report on durable goods "is just another number confirming how weak the second quarter was," Harris said.

Economists expect growth slowed in the April-June quarter to an annual rate of only 1.5 per cent, according to a survey by FactSet. That's down from 1.9 per cent in the first three months of the year.

But Harris says that may be too optimistic. He expects growth of only 1.1 per cent. And he believes the economy will remain sluggish for the rest of the year.

Europe's financial crisis has lowered demand for US exports. And the pending expiration of several US tax cuts at the start of next year, along with scheduled spending cuts, may be weighing on growth.

Many U.S. companies may postpone large investment plans until the outlook for those two issues improves, he said.

"Why am I going to make a big capital spending decision, when I know that in a few months the economy could take a big hit?" Harris asked. Some economists forecast that the looming US budget crisis could shave several points from next year's growth.

Overall durable goods orders rose to US$221.6 billion in June. That's 57 per cent higher than the recession low hit in the spring of 2009. But orders are still 9.1 per cent below their peak in December 2007, when the recession began.

Europe did receive a dose of good news Thursday when Mario Draghi, president of the European Central Bank, said he would "do whatever it takes" to preserve the euro currency.

Stocks surged on his comments. The Dow Jones industrial average rose 170 points in midday trading. Broader indexes also rose.

The housing market has been a bright spot this year. But a report Thursday showed the recovery will be bumpy.

The National Association of Realtors said its index of sales agreements fell 1.4 per cent in June to 99.3, down from 100.7 in May. A reading above 100 is considered healthy.

Contract signings typically indicate where the housing market is headed. There's generally a one- to two-month lag between a signed contract and a completed deal.

The index is 9.5 per cent higher than it was a year ago. And Joshua Shapiro, chief US economist at MFR, noted that despite June's drop, the index is higher than it was in April. That could translate into higher sales of previously occupied homes in July.

Separately, the Labour Department said the number of people seeking unemployment benefits fell by 35,000 to a seasonally adjusted 353,000. But economists view the report with skepticism because the government's seasonal adjustments didn't anticipate fewer summer shutdowns by automakers, which have resulted in fewer temporary layoffs.



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