Economic data hint of worries, Rebound may be delayed
Michael E. Kanell - Staff
Friday, July 26, 2002
Some troubling signs emerged Thursday that the economic recovery may be sputtering.
While an array of indicators have remained strong, reports showed declines in the sales of big-ticket goods and existing homes --- two vital cogs in the engine of expansion. Few mainstream economists see a plunge back into recession, but the solid rebound predicted just a few months ago seems to be growing elusive.
"The recovery is there, but it will be two steps forward and one step back," said Rajeev Dhawan, director of the forecasting center at Georgia State University. "And the trouble is, the way the stock market has been behaving, things are especially iffy."
Others are decidedly more downbeat.
"The United States should now be prepared for one of the deepest and most intractable recessions of the post--World War II period," said economist Wynne Godley, a distinguished scholar at the Levy Institute of Bard College in Annandale-on-Hudson, N.Y.
Both optimists and doomsayers Thursday could pluck ammunition from news that ranged across the economy:
> Durable goods. June showed a drop of 3.8 percent in sale of big-ticket items including steel, lumber, furniture, television and cars. Economists had expected a slight increase.
> Housing. Sales of existing homes fell 12 percent in June, compared with the small dip expected. Yet new-home sales hit a record, and that, too, countered expectations.
"The drop in existing homes is not serious because the level is still so strong," said economist Mark Vitner of Wachovia Securities.
> Joblessness. Unemployment claims fell 23,000 to 362,000 last week, trimming the number of beneficiaries to a four-month low of 3.5 million people. Although improvement in the picture seems slow, analysts had expected about 20,000 more claims.
> Wages and benefits. The employment cost index climbed 1 percent during the second quarter --- much more than expected.
"These are some pretty mixed signals," Vitner said. "But they are beginning to suggest that the recovery is starting to falter."
Increases in wages and benefits should mean that employees will continue to have money to spend --- and consumers represent two-thirds of all spending. Potent consumer demand is credited with keeping the economy out of the ditch.
But many companies are already scrambling to stay profitable. Larger payroll costs --- more than half of them in benefits like health care --- add to the incentive for cost-cutting, which could mean layoffs.
Deepening job worries could persuade consumers to close their wallets. And housing has been the main megaphone for consumer money, said Maury Harris, chief U.S. economist for UBS Warburg. "Housing strength likely is helping to sustain the recovery."
He shrugged off the negatives among the indicators. "So far, the equity [stock] slide does not appear to have stopped recovery, and we do not expect that it will."
While housing prices have climbed faster than incomes --- something that cannot go on indefinitely --- that has helped consumers feel affluent despite the collapsing stock market.
And defying months of dire predictions from debt "hawks," consumers have kept buying homes at a record pace.
June's decline in existing-home sales could be just the residue of exceedingly strong sales through late winter, when the weather was surprisingly warm.
More worrisome is the drop in durable goods. That could be a one-month aberration --- even a statistical hiccup. But if it is for real, trouble will likely follow. Consumers seem stretched to the limit, so unless the government boosts spending, growth may be up to business, which was the first economic factor thrown into reverse in 2000.
Cuts in company budgets mean fewer projects funded, which means less money in the economy and less hiring.
Dropping demand for big-ticket items hints that the whipsaw of Wall Street stocks is having a real-world effect, Dhawan said. "It means that the crisis of confidence is beginning to impact the boardroom."
With banks becoming more selective and bondholders getting a better payback, companies are finding loans either harder to come by or just plain costlier. And that slows investment, which dampens the economy.
The Federal Reserve last year dramatically lowered short-term borrowing costs, which helped inject billions of dollars into the economy. With rates at 40-year lows, few economists predict still more cuts.
But the Fed is fortunate that inflation is so low that there is no pressure to lift rates, Dhawan said. "The Fed estimated 3.5 percent growth during the second half of this year. That now looks way too rosy."
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