Signs that US economy may avert a 'double dip'

Consumer confidence dips, but big-ticket goods sell briskly and stock prices recover.

For months the economy has had some kind of cloud hanging over it.

The stock market was in the dumps, red-faced corporate executives were in hiding, and consumers – watching all this unfold – were starting to wonder about the future. The economic talk was about a return to recessionary times.

Now there's some sunshine mixed in with the clouds. The stock market has risen for five straight weeks, thanks to bargain hunting and a change in psychology. There hasn't been a CEO-in-handcuffs sighting for a few weeks. On Monday, the government reported that consumers are taking advantage of lower interest rates to snap up new houses at a record pace. And Tuesday the Commerce Department reported that orders for durable goods – costly items like computers and cars – jumped 8.7 percent, the largest increase in 9 months.

Although economists caution about reading too much into a short time span, it may mean the prospect of a "double-dip" recession is fading. At the very least, the let-up in bad news, suggests that the economy is not getting any worse.

"We're probably at the testing point," says John Silvia, chief economist at Wachovia Securities in Charlotte, N.C. "The economy turned up a few quarters ago, but it's had no strength to it."

One sign of that came yesterday when the Conference Board, a business research organization, reported that its August consumer confidence survey of 5,000 households dipped more sharply than most economists expected. The index fell to 93.5 from 97.4 in July.

Lynn Franco, the director of the Conference Board's Consumer Research Center, said the decline showed that business conditions had yet to turn around and consumer spending is not likely to help the economy in the near term.

Still, given the better stock market and improved economic news, economists a consumer survey later this month by the University of Michigan to move up. Even earlier this month, a Christian Science Monitor/TIPP poll showed a small uptick in its index of US economic confidence.

In fact, despite what consumers are saying in the surveys, they remain keen buyers of houses and automobiles, items whose sales depend in part on interest rates.

In the case of homes, mortgage rates – at below 6.25 percent – are now at their lowest level since the 1960s. Last month, new-home sales rose 6.7 percent to their highest monthly level ever.

Home prices rising

"It's a combination of stunning good finance and solid increases in house values," says David Seiders, chief economist for the National Association of Home Builders in Washington, D.C.

For example, on Monday, the National Association of Realtors (NAR) reported that the price of the average house in the US was up 9.2 percent from last year and 18.1 percent from the year before.

One of the driving factors continues to be a relatively low inventory of homes for sale. In July, housing inventory levels were up only 2 percent despite the increase in prices.

"The number of homes on the market remains lean, which is supporting strong price gains," says David Lereah, chief economist for NAR in Washington.

Helped by offers of 1.9 percent or lower financing, auto sales are moving briskly as well. In the latest durable goods report, auto-related orders rose 7.5 percent, following a 3 percent dip in June. The auto companies, buoyed by the good August, are set to increase production in coming months.

The bright spot in autos and housing comes even as consumers show concern over their future job prospects.

"They are concerned that the pace of growth will be slower than anticipated at the start of the year, and they expect fewer jobs to be created," says Richard Curtin, director of surveys of consumers at the University of Michigan. "That concern has tempered their own views of their own financial situation and how the economy will perform."

The consumer may be right.

Difficult job market

Job growth often lags behind an economic recovery, as companies are cautious about adding workers. Last week, a survey by Manpower Inc., the temp agency, found that only 24 percent of the businesses surveyed plan to add workers in the fourth quarter, down from 27 percent in the third quarter.

This dip is not unusual, says Jeffrey Joerres, Manpower's CEO. "This plateau is not unlike previous recovery periods, where the first few quarters of improvement are followed by a short adjustment phase as employers seek confirmation of a changed business environment."

Next week, economists will get a better idea of the labor picture when the government releases the August employment numbers.

"We need to add 115,000 jobs a month just to keep up with the growth of the labor market," says Donald Straszheim of Straszheim Global Investors in Santa Monica, Calif.

In the past three months, new jobs have averaged about 31,000 per month.

But the unemployment rate has not risen much in recent months, because the labor force has not grown. This may be because workers are getting discouraged and have stopped looking for work, or they may have gone back to school to improve their future chances.

Some workers may also have garnered extended unemployment benefits, which could also keep them out of the job searching labor pool.

Whatever the case, economists believe it's likely that unemployment will start to rise again, possibly near the end of the year – typically a key time for retail sales. For this reason, economists are not expecting a big economic bounce. Says Mr. Curtin: "This could be a more difficult Christmas season."

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