Politics & Government

Consumers hang in but economy slowing

Chuck Kennedy/MCT

WASHINGTON — The U.S. economy is slowing down, but it appears resilient enough to avoid recession and continue its nearly six-year-old expansion.

"The 'R' word we should be using is not recession but resiliency," said Ken Goldstein, a labor economist with The Conference Board, a business research organization in New York. "For all that's happened to energy prices, food prices, housing prices, for all of that, this is a consumer that continues to hang in there."

New economic data confirm that the economy is softening, yet it seems certain to avoid recession for at least the next six months. Home sales are plunging, job growth has slowed, corporate profits are flattening, oil prices are astronomical and consumers are losing confidence.

But U.S. exports are soaring, orders of goods needed for U.S. manufacturing are stable and average personal income is rising.

Perhaps most important, the Federal Reserve cut short-term interest rates by a half-point in September and is expected to slash another quarter-point next week to help spur economic activity. More cuts are likely down the road. The bottom line: Rather than stalling, the economy resembles a car in slow-moving traffic.

"The overall economy is probably in first gear, and will be for the next three or four months," Goldstein said.

John Silvin, the chief economist of Wachovia, in Charlotte, N.C., also predicts slower growth but no recession.

"Consumer spending is being helped by income and labor market fundamentals. Household net worth is benefited from gains in equity markets," Silvin wrote this week. He noted that falling inflation and growth in wages and salaries are combining to give consumers a shot in the arm, and their purchases drive about two-thirds of U.S. economic activity.

"The labor market is probably the best indicator of what is happening," Ed Lazear, the head of President Bush's Council of Economic Advisers, said at an economic roundtable Wednesday on CNBC.

Wages are rising and hours worked are stable, he said, suggesting that employers are paying more to hire and keep workers.

"That tells us the economy is strong," Lazear said.

Strong, yes, but weakening. The latest quarterly survey of business economists, published Monday by the National Association for Business Economics, confirmed a slowing expansion.

"After strengthening in the spring, growth slowed abruptly in finance, insurance and real estate, and transportation, utilities, information and communications," the association's 113 surveyed members reported.

Sluggish but positive job growth in September and upward revisions to the July and August employment statistics helped ease short-term recession concerns. People with jobs spend money.

To be sure, the economy faces some stiff challenges that could tip it toward recession:

_ Oil prices are near $90 a barrel. That fans inflation.

_ The U.S. dollar continues to sink against the world's major currencies, increasing risks that a disruptive event abroad could jolt it into freefall. That could force the Fed to raise interest rates to draw investment capital into Treasury bonds, even if it tipped the economy into recession.

_ Sales of new and existing homes keep dropping with no bottom in sight. The National Association of Realtors reported Wednesday that demand for existing homes fell to an eight-year low in September by a sharp 8.2 percent. Inventories of unsold single-family homes are at a 20-year high, putting pressure on prices. Median home prices nationally were 4.2 percent lower than in September 2006.

Yet growth overseas is helping to keep the U.S. economy out of recession. The weak dollar fuels strong export growth, nearly offsetting housing's drag on the economy dollar for dollar. Many U.S. companies reported strong third-quarter earnings this week thanks to their international operations.

One of them was shipping giant UPS, whose chief financial officer, Scott Davis, said Tuesday that the strong global economy helped make for a positive third quarter "even in the face of a lackluster U.S. economy."

Davis warned, however, that UPS wasn't expecting much holiday cheer at home.

"Fourth-quarter results will be driven by good performance in our international operations. . . . We expect slowing retail sales will restrain U.S. domestic volume growth," he said in a note to investors.

Wal-Mart Stores Inc. and Target Corp., the nation's largest retailers, have warned investment analysts that sales will slow this quarter. Wal-Mart's 2 percent sales growth last year was its weakest since it began keeping records, and the company told analysts Tuesday that sales are up just 1.4 percent for the first nine months of this year.

Appliances giant Whirlpool Corp. of Benton Harbor, Mich., reported rising third-quarter profits Tuesday because of global sales, but revenues at home fell 8 percent.

"The economic data that we are getting paints a really mixed picture on the national economy. Certain numbers suggest expansion continuing and gaining momentum," said Keitaro Matsuda, senior economist for Union Bank of California in San Francisco, while other indicators show a slowdown. "It's really difficult to read the trend."

For now, most economists expect growth in the range of a 2 percent annual rate through the first quarter of next year. Hardly robust, but growth.


NABE Industry Survey, October 2007.

CNBC White House Economic Summit.

Mortgage availability improving.

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