McClatchy...
Bad economic news
piles up, sending stocks down
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON — Hopes for blue skies ahead for the U.S. economy are fading
as forecasters are dialing back their annual growth projections after a
spate of lukewarm readings on the performance of the U.S. economy and
continuing global woes.
In recent weeks, there’s been less than stellar data coming out of
manufacturing, housing, car sales, consumer confidence and employment.
These piled up on top of high prices for oil, gasoline and other
commodities, debt troubles in Europe and cooling growth in Asia.
Taken together, it all points to half-speed economic growth ahead,
below what’s needed to get the U.S. and global economies on firmer
footing.
The flurry of dismal data sent stocks skidding Wednesday. The Dow Jones
Industrial Average fell 2.22 percent, or 279.65 points, to 12290.14.
The S&P 500 fell 2.28 percent, or 30.65 points, to 1314.55. The
Nasdaq was down 2.33 percent, or 66.11 points, to 2769.19.
The two latest poor data readings came Wednesday. The Institute for
Supply Management released its manufacturing index, which showed a
sharp slowdown, and the ADP National Employment Report, which showed
surprisingly weak private-sector hiring.
The employment report comes ahead of Friday’s much-anticipated May jobs
report from the Bureau of Labor Statistics. Analysts had expected
175,000 new jobs, but the ADP report showed private employers added
just 38,000 jobs in May. That’s a possible harbinger for a weak BLS
report after two consecutive months of strong numbers.
However, the ADP report has misfired at times as an accurate precursor
to the government report. Still, it isn’t the only sign pointing to
tepid hiring in May. First-time unemployment claims during the week of
May 21 rose by 10,000, to 424,000. That marked seven consecutive weeks
with claims above 400,000. The number dipped below 400,000 in February,
creating hopes that the economic recovery was in full bloom.
“A deceleration in employment, while disappointing, is not entirely
surprising. In the first quarter, GDP grew at only a 1.8 percent rate
and only about 2.25 percent over the last four quarters. This is below
most economists’ estimate of the economy’s potential growth rate and
normally would be associated with very weak growth of employment,” the
ADP report said.
Also disappointing was the Institute for Supply Management’s report on
manufacturing activity. The index continued to show growth, but “the
data suggest a significant slowdown from what was likely an
unsustainable pace,” said Cliff Waldman, an economist for the
Manufacturers Alliance/MAPI.
May’s 7 percentage point drop on the index in a single month — fueled
by an even larger 10 percentage point drop in the new orders component
of the index — is troubling. In a statement, Waldman warned it could
signal “sharper than expected moderation,” adding manufacturers no
longer have the wind at their backs.
“At this point, however, elevated commodity prices, slowing global
growth and an increasingly questionable outlook for the U.S. economy
are creating headwinds for the factory sector, which thus far has been
the one strong element in an otherwise sluggish U.S. economic rebound,”
he said.
David Malpass, the president of the research firm Encima Global, said
hiccups in auto production are to blame, and downplayed worries.
“Even with the letdown, manufacturing is showing stronger employment
readings than in the 1990s and 2000s expansions. We think manufacturing
employment will show weakness in the May establishment survey on
Friday, but will improve with auto production in the remainder of
2011,” he said in a research note.
Late Wednesday, credit rating agency Moody’s Investors Service
downgraded Greek government bonds, a move that unleashed new worries of
downgrades in other troubled economies such as Spain and Portugal.
European growth is increasingly sluggish, dampening demand for U.S.
exports.
These troubling indicators all came after another dismal report Tuesday
on home prices, as measured by the S&P/Case-Shiller National Index.
It found prices fell by 4.2 percent in the first three months of 2011,
on top of 3.6 percent drop in the final three months of 2010.
Home prices are “a big part of wealth, which is an important driver for
consumer spending. When house prices soften, that’s also bad news for
household wealth,” said Ben Herzon, an economist with Macroeconomic
Advisers in St. Louis, a leading forecaster. “And bad news for
household wealth makes us as a profession cautious about the prospects
for consumer spending.”
Confirming his view, the Conference Board’s monthly index of consumer
sentiment fell sharply in May to 60.8 from 66 in April, the
business-research group reported on Tuesday. Consumer spending often
tracks closely with sentiment.
Macroeconomic Advisers has sharply revised down its projection for
growth for the period between April and June — from a 3.5 percent
annual rate down to around 2.7 percent. It hasn’t published a full-year
growth revision but “that’s probably coming down as well,” Herzon said.
“A more pessimistic outlook is the primary reason for this month’s
decline in consumer confidence. Consumers are considerably more
apprehensive about future business and labor market conditions as well
as their income prospects,” Lynn Franco, the group’s chief economist,
said.
Adding to the gloom, carmakers on Tuesday and Wednesday reported a
slight dip in May sales, knocking the annualized rate down to an
estimated 12 million, up from 11.6 million a year ago but down from
last month’s rate of 13.2 million. High gasoline prices and rising
production costs combined to dampen sales.
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