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Will the U.S. Economy Double Dip?

Latest News > Industry News

August 27 — The news this week was a series of body blows to the U.S. economic recovery.
  • On Tuesday the National Association of Realtors (NAR) reported that existing home sales in July plummeted 27.2% versus May and 25.5% from July 2009.
  • On Wednesday the U.S. Census Bureau reported July new home sales fell 12.4% to a record-low annual rate of 276,000 units.
  • Also on Wednesday, the latest data from the Federal Housing Finance Agency (FHFA) showed that prices for homes purchased with government-sponsored mortgages dipped 0.3% in June, reversing May's gains and sending the Index down 1.7% from the same month last year.
  • However, on Thursday, the U.S. Labor Department reported weekly initial claims for unemployment declined 31,000, the second biggest drop of the year. Overall, claims remain high. The unemployment rate for insured workers declined by just one-tenth of a percent
  • This morning the Bureau of Economic Analysis said second quarter corporate profits rose to an annual rate of $1.372 trillion. Profits for the quarter were up 0.6% following a hefty 54.1% gain in the first quarter of the year. Year-over-year, corporate profits gained 37.7% compared to a 50.8% jump in the first quarter.
  • Also today, consumer sentiment as measured by the Reuter's/University of Michigan Index improved in mid-August by nearly two points from the July's month-end level. Sentiment remains below the recent high in June (76.04), but well ahead of the low of 55.3 in November 2008.
  • Finally, today, the U.S. Commerce Department lowered its estimate of how fast the economy grew in the second quarter. The new estimate is 1.6% in the quarter, down from 2.4% just one month ago.

What's behind the headlines?
There's no hidden bright side of the latest existing home sales figures. The slide in single-family home and condo sales took place in all regions of the country. Supply on the market swelled to 12.5 months, the greatest in 11 years. The tiniest bright spot: Sales remain 9.8% above abysmal year-ago levels.

A dip in new home sales was no surprise to anyone, although the drop was worse the consensus expectations. The federal tax credits that expired in April pulled demand forward, rather than creating much new demand. A decline was almost inevitable.

The fact is that job creation is one of the prime drivers of home sales. Until the employment picture improves substantially, either are new or existing home sales likely to brighten.

By the same token, weaker sales are likely to put renewed pressure on house prices throughout the U.S. Weaker prices can be expected for the near future.

On the other hand, it's hard to see the gain in corporate profits in a negative light. Yes, profit growth was off sharply from the first to the second quarter. But an increase of 54.1% in the first quarter is a hard act to follow. Even with the slower growth in the second quarter, corporate profits for the year remain well over a third above a year ago.

Unemployment remains a nagging and fundamental problem for the U.S. economy. A definite positive trend is hard to perceive in job creation. Employers are determined to do more with fewer employees, even as sales and manufacturing activity have increased in numerous sectors of the economy. A sustained upturn in job creation will signal a real turning point for the economy, when it comes.

Consumers tend to react to short-term news and changes. The improvement in consumer sentiment at mid-month seems unlikely to persist after this week's drumbeat of dismal news.

There is a somewhat positive angle to the lower estimate of Gross National Product. The decrease was less than expected by a consensus of economists surveyed by Bloomberg News. Equity markets initially rose on the news. As of mid-day, stocks indexes remained up, seemingly encouraged by the commitment made by Federal Reserve Chairman Ben Bernake for the Fed to, "do all that it can," to keep the economic recovery growing.