Bad economic news piles up, sending stocks down

McClatchy NewspapersJune 1, 2011 

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.

ON THE WEB

ADP report

Conference Board report

ISM report

MORE FROM MCCLATCHY

Would ending corporate tax breaks make dent in deficit?

WikiLeaks: Saudis often warned U.S. about oil speculators

Dallas-Fort Worth leads U.S. in job growth

McClatchy's probe into roots of financial crisis, a Pulitzer finalist

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

For more McClatchy politics coverage visit Planet Washington

McClatchy Newspapers 2011

McClatchy Washington Bureau is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service