By Amulya Nagaraj: Subscribe to Amulya's RSS feed
September 9, 2010 2:15 PM EDT
U.S. employment and housing sales data seem to indicate that economic recovery might be losing steam, triggering talks about another round of stimulus from the government.
Consumer confidence peaked in May as the preceding months showed a rise in home sales, boosted by the tax credit offer by the federal government. Sales spiked in April as people rushed to take advantage of the credit before it expired. However, data showing a drop in new home sales in June to a 40-year low indicated that celebrations were perhaps premature.
The slump has continued since, with existing home sales data in July touching a 15-year low and new home sales also being weak.
"The data definitely shows that the economic recovery was not as strong as it once was," Paul Dales, an economist at Capital Economics concurs.
While some of the slowdown was expected to occur naturally as inventory rebuilding - an important factor for GDP growth - ended, there are concerns about consumption growth as the boost from the fiscal stimulus fades and spending activity in both businesses and households slows down, Dales added.
Another stimulus from the government could get the economy a little kick. However, both analysts and economists are torn about the impact of such a boost. The last fiscal stimulus prolonged the inevitable slump and did not give the market a chance to recover at its own pace.
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Many are expecting another stimulus, even if a much smaller one than the last boost.
"The administration equates housing to recovery," Jack Micenko, an analyst covering the housing market with Susquehanna International Group, said.
He expects the stimulus to be around existing owners and refinance, and not particularly aimed at stimulating new demand.
A stimulus program that is structured around the longer term tax credits or infrastructure spending would give the economy a more lasting boost.
However, most people do not expect any stimulus, at least until the middle of next year, when the midterm elections would be over. Some believe that the economy would also need to worsen a lot more for the government to provide another stimulus as there are already concerns regarding the massive budget deficit.
CONSUMER SPENDING
A report released by the Bureau of Economic Analysis in August indicated that real disposable income decreased 0.1 percent in July, in contrast to an increase of 0.1 percent in June.
Personal consumption expenditures (PCE) increased $44.1 billion or 0.4 percent in July. PCE decreased $4.0 billion, or less than 0.1 percent, based on revised estimates.
The world's largest retailer Wal-Mart, whose second-quarter results topped market expectations, said consumers were not spending as much as the company expected. The company's results, which were announced mid-August, were mostly driven by international sales, while same store sales in the U.S. fell for the fifth consecutive quarter.
People are mostly wary of spending till they are more certain about the stability of the economic recovery. As unemployment figures inch higher every month, people choose to err on the side of caution.
"What we need is really a situation where employers somehow start to feel more confident about the sustainability of the economic recovery," Dales said, which will lead to more stable hiring.
Unemployment rose to 9.6 percent in August, after being constant for three months at 9.5. However, private employment added 67,000 jobs in the month, creating mixed feelings about the job situation.
"We see a recovery in jobs but that is not enough to reduce unemployment rate significantly. That is not enough for a solid recovery in the housing sector either," Azhar Iqbal, an economist at Wells Fargo Securities, said.
The minute rise in job creation is simply not enough to offset the historical high unemployment rate of 9.6 percent. Also, the fundamentals of the economy remain quite weak due to the 8 million job losses during the recession.
FADING RECOVERY HOPES
A weak job market translates into a weak housing market. The two segments are intricately connected, one sustaining the growth of the other and both contributing to GDP growth.
Without proper job creation, it is difficult to sustain any type of housing upturn, Eric Landry, an analyst covering the housing market at Morningstar, said.
The proof has already been seen in the housing data over the last few months. The tax credit motivated some people to enter the housing market, but with that gone, most people do not have the confidence or an incentive to jump off the sidelines into the housing market.
Economists expect the 9 percent unemployment rate to persist at least through the end of the next year. Housing starts are also expected to remain weak with less than one million per year.
If there is a belief that rates will remain low, there is no real incentive to jump off the sidelines and buy a house, according to Micenko from Susquehanna.
"And most likely if you have been on the sidelines, the catalysts aren't there for you to move into the market," he adds.
And as long as people are scared to spend, the economic recovery will remain in limbo.
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