Hopeful signs, but economy not out of woods - East Valley Tribune: Business

Hopeful signs, but economy not out of woods

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Posted: Wednesday, March 25, 2009 7:31 pm | Updated: 2:31 am, Sat Oct 8, 2011.

WASHINGTON — Glimmers of hope for the economy — better home sales and higher demand for goods, plus optimism from the White House and a nearly 20 percent rally in stocks — have some people wondering if the worst is over.

Not so fast, say many economists. Layoffs are still mounting and home prices are still falling in an economy shrinking at an alarming rate. A recovery anytime soon doesn't seem likely.

"We may be seeing the end of the beginning of this recession, but it is not the beginning of the end of the downturn," said David Wyss, chief economist at Standard & Poor's in New York.

Still, the recent news has been better than expected. On Wednesday, the Commerce Department said demand for big-ticket manufactured goods, which had fallen for six months in a row, actually rose by 3.4 percent in February.

And reports this week have shown sales of both new and existing homes rising by about 5 percent last month.

On Wall Street, the landscape looks better. The Dow Jones industrials gained about 90 points on Wednesday to close a fraction of a point under 7,750 — an 18 percent rally from its low point on March 9.

And President Barack Obama struck a more hopeful tone during his televised news conference Tuesday night. "We're beginning to see signs of progress," Obama said, adding that Americans should have a "renewed confidence that a better day will come."

"The good news is that we don't have the sort of unrelentingly persistent declines we had been seeing," said Nariman Behravesh, chief economist at IHS Global Insight, who thinks the economy "may be approaching a bottom."

The GDP fell at an annual rate of 6.2 percent in the fourth quarter. Behravesh expects an even more severe decline for this quarter, and even a slight positive by the end of this year.

For now, in five key areas of the economy, there are both signs of life and reasons to believe the worst is not yet over.

DURABLE GOODS

The good news: Orders for manufactured products expected to last at last three years, or durable goods, rose last month for the first time since July. Economists were expecting them to fall instead. And orders for nondefense capital goods, a key indicator of business investment plans, surged 6.6 percent.

Reality check: Orders for durable goods are still below their levels of a year ago, and analysts believe they will remain low because of weak demand both here and overseas for cars and other big-ticket items.

NEW HOME SALES

The good news: Sales of new homes rose 4.7 percent in February from a month earlier. And the government revised January's figures higher. It was the first monthly gain for new home sales since July — perhaps a sign that developers have slashed prices and construction so much that sales have finally hit bottom.

Reality check: Developers still face competition from foreclosures, and there's still a mountain of unsold homes. The results from February were still the second-worst in records that have been kept since 1963. (January was the worst.) Experts are waiting for several months of increases before declaring the worst is over. "For me to be encouraged, I'd have to see a trend," said Barclays Capital analyst Michelle Meyer.

EXISTING HOME SALES

The good news: Sales of previously occupied homes went up 5.1 percent in February from the month before. Buyers took advantage of a market that pushed the median price down 16 percent from a year earlier. Mortgage rates are historically low, and a new $8,000 tax credit for first-time home buyers also could further lift sales.

Reality check: It's too early to proclaim a comeback for the beleaguered housing market. Sales of existing homes are still the lowest they've been in a more than a decade. Mounting layoffs are likely to keep many borrowers on the sidelines, and thousands of foreclosed properties have yet to go up for sale in an already glutted market. That's likely to push prices down even more, analysts say.

RETAIL SALES

The good news: Shoppers bought a few more necessities in February, offering some hope for stores. Retail sales only dipped 0.1 percent, and they actually rose in January. J.C. Penney and Target both said their same-store sales were down, but not as sharply as expected. That could be a tentative sign that the downward spiral in sales is moderating.

Reality check: A lot of the retail industry's better performance is because of sales gains at Wal-Mart, where shoppers have hunted for discounts in the recession. Take out Wal-Mart Stores Inc., and same-store sales across the industry were down 4.3 percent, according to statistics kept by the International Council of Shopping Centers. Economists worry that spending could deteriorate further as layoffs mount.

WALL STREET

The good news: The stock market has finally caught a break. Major banks such as Citigroup and Bank of America have said they were profitable in January and February, and Wall Street embraced the details of the Obama administration's plan to relieve banks of toxic assets.

Reality check: Stocks could easily plummet again, especially if the banks are unable to eke out first-quarter profits or if the Obama plan doesn't entice investors to buy up the toxic assets. And the Dow is roughly 6,500 points below its all-time high. Retirement funds look better compared with two weeks ago, but distrastrous compared with almost anything else. "Has something materially changed here? I don't think so," said Bill Strazzullo, chief market strategist for Bell Curve Trading. Of the banks' better performance, he said: "The bar was an inch off the ground, and they had crutches."

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