Recovery in Danger as Firms, Homebuyers Cut Back
August 25, 2010 - 11:23 AMThe economic recovery appears to be stalling as companies cut back last month on their investments in equipment and machines and Americans bought new homes at the weakest pace in decades.
Overall orders for big-ticket manufactured goods increased 0.3 percent in July, the Commerce Department said Wednesday. But that was only because of a 76 percent jump in demand for commercial aircraft.
Taking out the volatile transportation category, orders for durable goods fell at the steepest rate since January. And business orders for capital goods took their sharpest drop since January 2009, when the economy was stuck in the deepest recession in decades.
Separately, Commerce said new home sales fell 12.4 percent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600. That was the slowest pace on records dating back to 1963. Collectively, the past three months have been the worst on record for new home sales.
The weak sales mean fewer jobs in the construction industry, which normally powers economic recoveries. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.
The two reports are likely to stoke fears that the economy is on the verge of slipping back into a recession. They follow Tuesday's report that showed sales of previously owned homes fell last month to the lowest level in decades. Unemployment remains near double digits and job growth in the private sector is slowing.
"The rebound in manufacturing was one of the bright spots in an otherwise disappointing recovery," said Paul Ashworth, senior U.S. economist at Capital Economics. "Take it away, throw in a relapse in housing, and you don't have much left."
Factory orders are a key measure of the economic recovery. Manufacturers have helped to lead the rebound. They filled orders for businesses that were building up stocks after whittling them down during the recession.
But many companies are done restocking, cooling demand for factory goods.
Demand for durable goods has mostly risen in recent months. Orders are 15.6 percent higher than they were a year ago. Excluding transportation, demand has increased in all but two months this year.
Overall orders in June declined by a revised 1.0 percent. But excluding transportation, orders rose 0.2 percent. Spending by businesses increased 3.6 percent that month - a rare bright spot.
Durable goods are expected to last three years or more. The full survey of factory orders will be released next week.
Housing has never fully recovered from the recession. Builders have been forced to compete with foreclosed properties offered at significantly lower prices.
New home sales made up only about 7 percent of the housing market last year. That's down from about 15 percent before the bust.
The industry received a boost this spring when the government offered tax credits to homebuyers. But since they expired in April, the number of people looking to buy homes has dropped, even with bargain prices and the lowest mortgage rates in decades available.
More than 600,000 new homes were sold annually from 1983 through 2007. After the housing bubble popped, sales plunged to 375,000 last year. That was the weakest yearly total on record.
Builders have sharply scaled back construction in the face of weak sales. The number of new homes up for sale at the end of July was unchanged at 210,000, the lowest level in about 40 years.
Due to the sluggish sales pace, it would still take more than nine months to exhaust that supply, above a healthy level of about six months.
New home sales were down nationwide. They fell by more than 25 percent from a month earlier in the West, 14 percent in the Northeast, 9 percent in the South and 8 percent in the Midwest.
The median sales price in July was $204,000. That was down 4.8 percent from a year earlier and down 6 percent from June.
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