Rebecca Cook
Signs are mounting that the U.S. economic recovery is losing steam as stimulus measures fade and companies remain reluctant to hire.
A collection of readings Thursday from diverse areas of the economy - housing, manufacturing, employment and construction - all reinforced the sense that the expansion of the world's largest economy is decelerating in the face of considerable headwinds.
Most disappointing to economists was a thudding drop in pending home sales in May following the expiration of a tax credit aimed at first-time home buyers. Those sales fell 30 per cent from a month earlier, the largest such decline on record.
A gauge of U.S. manufacturing for June also fell slightly more than economists had predicted, though the reading still indicates that the sector is expanding.
Meanwhile, the number of people filing new claims for unemployment benefits rose unexpectedly last week, a sign of continuing stress in the labour market ahead of a key jobs figure due Friday. That report is expected to show that the unemployment rate edged higher in June.
Thursday's data arrive at a sensitive juncture. The massive effort to stimulate the economy through government spending is on the wane, while efforts by business to restock inventories that were slashed in the recession are largely complete.
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The majority of economists believe that the data simply point to more muted growth for the rest of the year and into 2011. Some experts, however, worry that that slower expansion could be a prelude to a double-dip recession.
Concerns over the vigour of the U.S. recovery, paired with ongoing weakness in Europe, have driven U.S. stocks to their lowest point for the year. The Dow Jones Industrials Average fell 10 per cent in the second quarter and dipped again on Thursday to 9732.53, its sixth straight decline. (Canadian markets were closed for the Canada Day holiday.)
"Folks are beginning to wonder what's going to happen to the rest of the economy as all this stimulus starts to wind down," says Mark Vitner, an economist at Wells Fargo & Co. "They're finally waking up to the fact that the second half of the year is going to be slower."
Thursday's figure on U.S. manufacturing activity fits into a broader global picture showing that the growth rate in the factory sector has peaked everywhere from China to Europe.
The Institute for Supply Management's manufacturing gauge fell more than forecast to 56.2 in June from 59.7 in May. Readings above 50 indicate expansion.
Manufacturing has been a powerhouse in the current U.S. economic recovery. The worry is that if activity in that area slows, "there is no sector ready to take the growth baton," said Dan Greenhaus, chief economist at Miller Tabak & Co. in New York.
Other economists said the ISM figure showed little cause for concern. "Today's minor deceleration is in no way alarming," said Alistair Bentley, an analyst at Toronto-Dominion Bank. "The economy has been officially expanding for nearly a year, and it is normal for growth to slow slightly at this stage of the cycle."
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An Investor's Guide to Understanding the Economy by Gary Rabbior:
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But investors were also shaken by bad tidings from the beleaguered U.S. housing market. They had anticipated a drop in pending sales in May after a tax credit expired, but the size of the decline took them aback. "Once the tax credits expire, demand gets eviscerated," says Mr. Vitner of Wells Fargo.
The housing figure was coupled with another piece of troubling news, as initial jobless claims rose, confounding hopes that the job market would show signs of perking up. The claims jumped by 13,000 to 472,000 for the week ended June 26.
Because the weekly figures are volatile, experts like to focus on longer-term averages. But the four-week moving average also increased to 466,500, the highest level since early March.
The fact that new applications for unemployment benefits are on the rise is "quite alarming, because it suggests the employment market is deteriorating," said Michael Englund of Boulder, Colo.-based Action Economics.
Construction spending fell 0.2 per cent in May, the first decline in three months, the Commerce Department reported. Economists had predicted a slightly larger decrease.
David Milstead's report is special to The Globe and Mail