Weak Data Trigger U.S. Recession Fears

Aug. 26, 2010
The prospects of the U.S. economy going into a 'double dip' recession is increasing, especially as high unemployment restrains consumer spending, a key growth driver, economists say.

The odds of the U.S. economy slipping back into recession have risen as new data point to a worsening housing slump and the manufacturing sector slowing markedly amid high unemployment and weak consumer spending.

The government said on August 25 that new homes sales fell to their lowest level in about half a century and manufacturing orders came in far worse than expected. Sales of new single-family houses unexpectedly slumped 12.4% in July to 276,000 units from a month earlier -- breaking below the 300,000 level for the first time in the 47 years the government has been gathering the data.

The figure baffled most economists, who had expected sales to rise on the back of falling prices and record low borrowing costs.

On August 24, an industry group said existing U.S. home sales -- considered the core of the residential real estate market -- plunged a whopping 27.2 % in July to levels unseen in more than a decade.

In another surprise on August 25, government data showed new orders for manufactured durable goods -- items such as planes, cars, refrigerators and computers -- rising only 0.3% in July.

In addition, business capital spending showed a massive contraction, according to the data.

Core capital orders -- a proxy for future business investment -- declined 8%, the worst such reading in 18 months.

The lackluster orders for durable goods signal setbacks for the star manufacturing sector.

The new data for durable goods' orders "indicate that the manufacturing sector is slowing markedly," said Boris Schlossberg, director of currency research at Global Forex Trading.

They also suggest that "consumer demand is deteriorating rather than improving as we move into the second half of the year."

Against the bearish backdrop, the prospects of the U..S economy going into a "double dip" recession is increasing, especially as high unemployment restrains consumer spending, a key growth driver, economists say.

"The odds of a second dip have risen, but this owes to weaker hiring and consumer spending," said Aaron Smith, a senior economist for Moody's Economy.com.

A housing mortgage meltdown plunged the U.S. economy into the worst recession in decades in December 2007. The economy started growing again since the middle of the year, but expansion has slowed in recent months blamed mostly on the effects of a near 10% unemployment rat.

Reflecting the gloom, the government is expected to significantly revise downward the economic growth chalked up in the second quarter. The government could downgrade growth to 1.4% from 2.4% previously when it presents an economic report on August 27, most economists said.

More disappointing data raise the risk that third quarter gross domestic growth would come in below 1%t, said Ryan Sweet, a senior economist with Moody's Economy.com.

Latest reports also strongly suggest that the ranks of working Americans will shrink in August for the third consecutive month, he said.

"Still, sentiment requires careful monitoring and could be the difference between lasting growth and a double dip," Sweet said. "The recovery is too fragile to withstand any additional slowing in spending by businesses and consumers."

Copyright Agence France-Presse, 2010

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