U.S. Economy: Durables, Housing Signal Recession Risk

Durable Goods Orders in U.S. Rise Less Than Forecast
Customers shop for refrigerators at Abt Electronics in Glenview, Illinois. Photographer: John Zich/Bloomberg

Orders for durable goods in the U.S. increased less than forecast in July and sales of new homes unexpectedly dropped, increasing the risk of a renewed recession in the world’s largest economy.

Bookings for goods made to last at least three years rose 0.3 percent, figures from the Commerce Department showed today in Washington. Excluding transportation equipment, demand fell by the most in more than a year. Purchases of new dwellings fell 12 percent to an annual pace of 276,000, the weakest since data began in 1963, figures from the same agency showed.

The reports indicate capital spending, one of the few bright spots in a weakening economic recovery, is slowing as the second half begins, while a lack of jobs is crippling housing. Mounting signs of a slowdown are increasing pressure on the Federal Reserve to find more ways to spur growth after saying this month it would prevent its securities holdings from shrinking.

“The risks of a double-dip recession are steep enough to provide cause for worry,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York, who said the odds of another economic slump are now about one-in-three, twice as high as earlier this year. “It calls for more remedial action by the Federal Reserve.”

Stocks rallied, erasing earlier losses, and Treasuries dropped on speculation the retreat in riskier assets was overdone given the economic outlook. The Standard & Poor’s 500 Index rose 0.3 percent to 1,055.33 at the 4 p.m. close in New York. The yield on the benchmark 10-year note increased to 2.54 percent from 2.49 percent late yesterday.

Builder Shares

Homebuilder shares gained on speculation the worst of the decline is over, said Jack Micenko, an analyst at Susquehanna International Group LLP. The S&P Supercomposite Homebuilding Index rose 3.7 percent. Toll Brothers Inc. reported today its first quarterly profit since 2007 after a tax benefit and a drop in writedowns.

The median estimate of 75 economists surveyed by Bloomberg News projected orders for durable goods would rise 3 percent. Estimates ranged from gains of 1.2 percent to 6.8 percent.

Bookings excluding transportation equipment dropped 3.8 percent, the most since January 2009. The survey median projected a 0.5 percent gain.

Cisco Systems Inc., the world’s largest maker of networking equipment, this month forecast first-quarter sales that missed analysts’ estimates. Chief Executive Officer John Chambers said the San Jose, California-based company was seeing “unusual uncertainty” and getting “mixed signals” about the health of the economy.

Economy, Election

With little more than two months remaining before the midterm elections in which Republicans hope to claim a majority of the U.S. House, some lawmakers are stepping up attacks on Democrats. House Republican leader John Boehner yesterday called on President Barack Obama to fire Treasury Secretary Timothy Geithner and the other remaining members of the president’s economic team, saying the stimulus policies are failing to create jobs.

Today’s report on goods orders showed demand for non-defense capital goods excluding aircraft, a proxy for future business investment, dropped 8 percent after climbing 3.6 percent in June, more than previously estimated. Over the past three months, these orders climbed at a 20 percent annual pace, down from a 31 percent gain in the three months to June, signaling companies will rein in investment.

Shipments of those items, used in calculating gross domestic product, decreased 1.5 percent after rising 1 percent in June, also more than estimated last month.

‘Atrocious’ Implications

While these categories tend to slacken early in a quarter, “the capital spending implications still look atrocious,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note to clients. “The downshift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year.”

Corporate spending on equipment and software jumped at a 22 percent annual rate in the second quarter, the biggest increase since 1997, the Commerce Department said on July 30.

Housing may already be relapsing after a government tax break expired earlier this year. Today’s report showed the median price of a new home fell to $204,000 in July, down 4.8 percent from the same time last year and the lowest since late 2003. Purchases fell in all four regions of the country, led by a 25 percent drop in the West.

Home Sales

Sales of existing homes plunged a record 27 percent last month, according to a report yesterday from the National Association of Realtors. Home resales are tabulated when a contract is closed, while new home sales are counted at the time an agreement is signed, making them a leading indicator of demand.

“The housing market’s recovery has taken a big step back,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “Potential buyers are content to sit on the sidelines, which is understandable considering we have a near double-digit unemployment rate.”

Economists surveyed by Bloomberg this month forecast unemployment will end the year at 9.5 percent, unchanged from the rate in June and July.