A week of weakness seen for U.S. economy
Analysts bearish on data as economy 'perched on the edge of a cliff'
SAN FRANCISCO (MarketWatch) -- "Perched on the edge of a cliff." That's how one economist describes the U.S. economy as the markets get ready for a busy week of data, including numbers about the already damaged U.S. housing market, orders for durable goods and personal income and spending. "What we're looking for is confirmation that indeed the U.S. economy is slowing sharply in the fourth quarter," says Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ. Zentner said that within a month, it could be apparent whether the economy is slipping into a recession or not. "The U.S. economy is really perched on the edge of a cliff right now," says Zentner. Housing has been a big drag on the economy and this coming week's data forecasts don't offer any hope that the housing outlook will improve. Analysts surveyed by MarketWatch are expecting existing home sales, for example, to drop to a seasonally adjusted annual rate of 4.99 million in October from an eight-year low of 5.04 million in September. The existing home sales report is due out at 10 a.m. on Tuesday.
On Thursday at 10 a.m., analysts are forecasting that new home sales for October will fall to a seasonally adjusted annual rate of 730,000 from 770,000 a month earlier. "We don't expect any good news on housing anytime soon, specifically on the demand front," says Ryan Sweet of Moody's Economy.com. Demand will remain weak for the remainder of the year and well into 2008, he says. In other housing-related data, October construction spending is expected to fall by 0.2% following a modest rise of 0.3% in September. That release is scheduled for 10 a.m. Friday. Two home-price measures are due out this week also: the Case-Shiller Home Price Index on Tuesday and the house price index from the Office of Federal Housing Enterprise Oversight on Thursday. For the third quarter, the Case-Shiller index is expected to fall by 5.01%, while the Ofheo index is expected to be flat in the third quarter.
Federal Reserve officials believe a substantial decline in home prices is a big risk to the economy, according to forecasts released for the first time by the Fed on Tuesday. The Fed's forecasts, combined with the summary of its October meeting, appeared to show more concern about slower growth than higher inflation. This focus on weakening growth differed from the FOMC statement released at the end of the committee's October meeting, analysts said. However, many analysts are skeptical the Fed will cut rates at its next meeting on Dec. 11. "We still think the Fed will stand idle at the December FOMC meeting, but it has become a much closer call," said Sweet of Moody's Economy.com. "Growth is fading and uncertainty is growing." Jim O'Sullivan of UBS believes that the Fed will continue to cut rates, including in December. "I suspect they're going to be surprised at how much weakness there is" in the data this week, says O'Sullivan.
In particular, he said, consumer spending and the labor market will bear watching. Economists say the labor market may be weakening after a government report on Wednesday showed more Americans continuing to receive jobless benefits. The number of Americans receiving state jobless benefits increased 7,000 to 2.57 million in the week ending Nov. 10, the Labor Department reported. Initial jobless claims fell to 330,000 but analysts are watching to see if they get worse. "Recent data on initial jobless claims suggest layoff activity is gradually accelerating as the full effects of the fallout from tighter credit conditions and the housing recession are realized," notes Sweet. He says a sustained run of more than 350,000 initial claims coupled with continued softness in hiring "would signal much deeper issues in the labor market." The Labor Department will report weekly jobless claims on Thursday at 8:30 a.m. Eastern.
The pace of consumer spending is also expected to have fallen in October. On average, analysts surveyed by MarketWatch are expecting consumer spending to increase by 0.2% in October, down slightly from its 0.3% gain in September. Sustained weakness in consumer spending, says Sweet, "could be the catalyst that tips the economy into a recession." While the jury is still out on whether to expect a recession, the Fed is at least expecting the U.S. economy to slow by more than previously thought in 2008. But the central bank is predicting inflation will remain tame. In the forecasts released on Tuesday, Fed officials said growth would slow to a range of 1.8% to 2.5% next year, down from growth around 2.45% in 2007.
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