The Herald Bulletin

Morning Update

Nation & World

June 25, 2013

Reports reflect Fed's message of stronger economy

WASHINGTON — The U.S. housing recovery is strengthening. Factories are fielding more orders. And Americans' confidence in the economy has reached its highest point in 5½ years.

That brightening picture, captured in four reports Tuesday, suggests that the economy could accelerate in the second half of the year. It underscores the message last week from the Federal Reserve, which plans to slow its bond-buying program this year and end it next year if the economy continues to strengthen. The Fed's bond purchases have helped keep long-term interest rates low.

Investors appeared to welcome the flurry of positive data. The Dow Jones industrial average rose 100 points to close at 14,760, and broader stock indexes also ended the day up. Those gains made up only a fraction of the markets' losses since Chairman Ben Bernanke said last week that the Fed will likely scale back its economic stimulus within months — a move that would send long-term rates up.

But the rising confidence of U.S. consumers shows that most Americans are focused on a better job market, said Beth Ann Bovino, chief economist at Standard & Poor's.

"Maybe households agree with the Fed: the economy is improving," Bovino said.

The Conference Board said its consumer confidence index jumped this month to 81.4, the highest reading since January 2008. The New York-based research group said consumers appear more encouraged by economic conditions and more optimistic about where the economy and job market are likely headed over the next six months.

Last month, U.S. employers added 175,000 jobs, which almost exactly matched the average increase of the previous 12 months. Steady job growth has gradually reduced the unemployment rate to 7.6 percent from a peak of 10 percent in 2009. And rising home and stock prices since the recession ended four years ago have made many Americans feel wealthier.

The combination has kept consumers spending this year despite higher Social Security taxes and steep government spending cuts that took effect this year.

The survey was completed June 13, so it didn't reflect the past week's plunge in stock prices. The market turmoil might lower July's consumer confidence. Still, many economists say they doubt that any drop in confidence would be dramatic.

For most Americans, the biggest investment is their home. And a steady rise in prices is allowing them recover much of the wealth they lost during and immediately after the Great Recession.

U.S. home prices jumped 12.1 percent in April compared with a year ago, according to the Standard & Poor's/Case-Shiller 20-city home price index. That was the biggest year-over-year gain since March 2006.

For a fourth straight month, prices rose from a year earlier in all 20 cities in the index. Twelve cities posted double-digit price gains.

More buyers and a limited supply of available homes have lifted prices in most cities. Higher prices have, in turn, fueled further sales and encouraged builders to ramp up construction. A more sustainable housing recovery is contributing to economic growth and creating more jobs.

Sales of new homes rose in May to a seasonally adjusted annual rate of 476,000, the Commerce Department said. That was the fastest pace since July 2008. Though sales of new homes remain below the 700,000 annual rate that most economists consider healthy, the pace has jumped 29 percent from a year ago.

Last week, the National Association of Realtors said sales of previously occupied homes in May surpassed the 5 million mark for the first time since November 2009.

At a news conference last week, Bernanke noted that the strength in housing was a key reason the Fed had raised its outlook for growth next year and is moving toward slowing its pace of bond buying.

The Fed's bond purchases have helped fuel the housing gains by keeping mortgage rates down. As recently as early last month, the average rate for a 30-year fixed mortgage was 3.35 percent, just above the record low of 3.31 percent. The average remains historically low at 3.93 percent.

Many investors worry that many consumer and business loan rates, which have already started to rise, will jump once the Fed scales back its bond purchases. More expensive loans could slow the housing recovery and sap the economy's momentum at a critical moment.

Even so, Mark Vitner, an economist at Wells Fargo, said the reports point to underlying strength that should enable the economy to withstand jittery financial markets.

"The economy is strong enough now that it can handle a couple of rough days on Wall Street," Vitner said.

The weakest part of the economy this year has been manufacturing, which has been held back by a recession in Europe and tepid growth in other overseas markets. But factory activity may start to rebound, according to a report from the Commerce Department. The department said orders for durable goods rose 3.6 percent.

Most of the increase was due to commercial aircraft orders, which tend to fluctuate sharply from month to month. Still, businesses also ordered more computers, communications equipment, machinery and metals.

As a result, a category of orders that's viewed as a proxy for business investment plans — which excludes the volatile sectors of transportation and defense — rose 1.1 percent. That matched similar gains in April and March. This category hadn't risen for three straight months since 2011.

Paul Ashworth, chief U.S. economist at Capital Economics, said he still thinks economic growth is slowing in the April-June quarter to an annual rate below 2 percent. That would be down from a 2.4 percent annual rate from January through March.

But Ashworth said the pickup in orders should help drive a stronger economy in the July-September quarter. He said growth could exceed an annual rate of 2.5 percent in the final three months of the year.

 

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