The ongoing economic recovery is in trouble.
Following a report Tuesday that home prices have now tumbled further from their peak than during the Great Depression, there was evidence Wednesday that the economic rebound from the worst recession since World War II may be sputtering.
The manufacturing sector, one of the few bright spots leading the recovery since the recession ended in June 2009, slowed sharply in May, according to a report Wednesday from the Institute for Supply Management. The survey of purchasing managers showed that after nearly two years of uninterrupted growth, the index posted its biggest drop since 1984, to the slowest pace in 20 months.
A separate report said the growth of private-sector job growth hit a wall in May, coming in far below expectations and falling to the lowest level in eight months. The monthly report showed that private employers added just 38,000 jobs last month, according to payroll processor ADP. Economists surveyed by Reuters had forecast a gain of 175,000 jobs for May.
More than four years after the Great Recession began, the weak job market and ongoing housing slump have become major issues in the presidential election campaign now taking shape. Those issues have recently been upstaged by the more immediate battle over shrinking the bloated federal budget deficit. If applied too quickly, deep cuts in federal spending could further dampen economic activity.
The slowdown in manufacturing can be blamed, in part, on the massive earthquake in Japan in March, which cut deeply into auto production there and crimped the global supply chain for auto parts and electronic components. Some economists believe those supply interruptions could knock as much as a half a percentage point off economic growth.
But, in just the last week, the signs of a U.S. slowdown have become more widespread.
“There's a lot of other signals out there suggesting a marked slowdown and a lot of surprises to the downside,” said Joel Prakken, chairman of Macroeconomic Advisers, which compiles the ADP jobs data.
Among those signals:
- Gross domestic product turned in a disappointing performance in the first quarter, rising 1.8 percent. That’s down from 3.1 percent in the fourth quarter and well below the “trend growth” level that economists say indicates an economy on the mend.
- The number of Americans applying for unemployment benefits is up; last week applications rose by 10,000 to a seasonally adjusted 424,000. That’s above the 375,000 level considered to be consistent with sustainable job growth. Applications peaked at 659,000 during the recession.
- Consumer spending, more than two-thirds of economic activity, grew at a much slower 2.2 percent rate in the first three months of this year, down from a 4 percent clip in last year’s fourth quarter.
- Higher gas prices and a tough job outlook continue to weigh on consumer confidence, according to the Conference Board. The research group’s influential index fell to a six-month low of 60.8 from a revised 66.0 in April; economists had expected the index to increase to 67.0.
The rash of downbeat data has prompted economic forecasters to cut their growth estimates for 2011. Last week, Goldman Sachs cut its outlook for the second time in a month. The bank now expects 3 percent growth in the second quarter, down from 3.5 percent three weeks ago and 4 percent at the start of the year.
After Wednesday's disappointing data, Goldman also cut its forecast for May job growth, as measured by the government report due out Friday, to 100,000 from the previous estimate of 150,000 jobs gained.
Investors responded to Wednesday's grim reports by selling stocks and the dollar and buying gold and Treasury bonds, which are traditional safe havens in times of economic uncertainty.
House prices sliding
Perhaps most worrisome, the housing market slump that led the economy into the Great Recession has resumed. An index of home prices in big metro areas released Tuesday has reached its lowest level since 2002, driven down by foreclosures, a glut of unsold homes and the reluctance or inability of many to buy.
Prices fell in 18 of the metro areas tracked by the Standard & Poor's/Case-Shiller 20-city index; prices in a dozen markets hit their lowest points since the housing bubble burst in late 2006.
The nationwide index fell for the eighth straight month. Prices have now fallen further in percentage terms since the bubble burst than they did during the Great Depression.
Based on the Case-Shiller index, prices are now 33 percent below the 2006 peak – to a level last seen in the third quarter of 2002. That’s further than the 31 percent price drop during the Great Depression. It took 19 years for the housing market to regain its losses after the depression ended, noted Paul Dales, a senior economist at Capital Economics.
The drop in prices coupled with extremely low mortgage rates has made houses more affordable than at any time in decades. Two rounds of government tax incentives provided temporary sales pickups. But since the last round expired, demand has fallen to levels not seen in more than a decade.
“Just about everybody agrees we're going to miss the seasonally strong season in 2011, which should be beginning in May,” said David Blitzer, chief economist at Standard & Poor's, which publishes the Case-Shiller home price index. “Nobody thinks that will make any difference. Everybody’s now keeping their fingers crossed for 2012, and wondering whether people just don't want to own homes anymore. “
For those who do want to own a home, there are plenty of houses to choose from. Much of that inventory consists of foreclosed properties that are selling at deep discounts to the last home sold, pushing market prices lower.
Some 6 million homes have already been lost to foreclosure. More than 4 million more mortgage holders are 90 days or more late on their payments; they're considered likely to enter the foreclosure pipeline.
Some economists fear that falling home prices may be creating a powerful downward cycle as more homeowners watch the value of their homes fall below what they owe on their mortgage, creating another round of defaults and foreclosures. Some 12 million homeowners with mortgages are already "underwater."
“Every time this price ticks down, not only does that number go up, but the already underwater homeowners go deeper underwater," said Stephen Meister, a real estate lawyer with Meister, Seelig & Fein. "And when that happens, people lose hope. They stop paying.”
Since the housing boom turned to bust in 2006, falling home prices have also wiped out trillions of dollars in household wealth, blowing a large hole in the value of what is, for many Americans, their biggest financial asset. A further drop in prices could prompt consumers to tighten their spending even further
“A sustained fallback in house prices would limit any gains in confidence and consumption growth,” said Dales. “Households still do not have the ability or willingness to boost their spending significantly.”