Where is the economy headed? Statistics break both ways By Nell Henderson, Washington Post, Wednesday, December 06, 2006 The U.S. economy can't seem to make up its mind. It keeps showing strength and weakness, with fresh data yesterday providing still more mixed signals -- and fueling a debate over whether the housing slump is dragging the nation into a recession. The conflicting data could be a sign that the economy is turning, with what was at first a mild growth slowdown about to give way to a harsher downturn, some analysts said. But others echoed the Federal Reserve, countering that the worst news is still coming from businesses involved in housing and automobile production while the rest of the economy is holding up. The situation has left many investors confused and queasy; stock prices rose yesterday after falling Friday, as did the dollar. "No question, housing is in a recession," said Nariman Behravesh, chief economist for Global Insight, an economic research and forecasting firm. "The big question, and where people part ways, is how much effect is this going to have on consumer spending and business spending? . . . Yes, there are scary parts of the economy, but there are other parts that are doing okay." The pessimists could point yesterday to the Commerce Department's report that new orders to U.S. factories fell 4.7% in October, the steepest decline in six years. Much of that reflected falling demand for home-building equipment and materials, as well as automakers' production cuts, analysts said. That echoed a report released Friday showing that manufacturing declined in November. But optimists noted that the much larger service sector of the economy -- which includes health care, finance, education, travel and entertainment, accounting for 87% of the nation's economic output -- grew more briskly in November than in the month before, according to an index published yesterday by the Institute for Supply Management. Stocks rose yesterday because of that report's "favorable implications for the overall economy," said Stuart Hoffman, chief economist with PNC Financial Services Group. The economy also headed into the last three months of the year in better health than previously thought, the Labor Department said yesterday, raising its estimate of productivity growth in the July-through-September period. Growth in productivity -- output per hour of labor -- still slowed sharply from the second quarter, to a weak 0.2% annual rate in the third quarter, the department said. But that was higher than its earlier estimate of no growth. The recent figures all confirm that the economy has lost momentum this year, expanding at a rapid 5.6 percent annual rate in the first three months, at a moderate 2.6% pace in the second quarter and at a 2.2% pace in the third. Many economists, including those at the Fed, think growth will be even weaker in the last three months of the year. For example, Macroeconomic Advisers, a St. Louis forecasting firm, predicts that the economy will expand at about a 1.5% annual rate in the October-through-December period. The disagreement is over what comes next. Fed Chairman Ben S. Bernanke said last week that he foresees moderate economic growth over the next year. Analysts peg that somewhere between a 1 and a 2.6% pace, which would be slower than the economy's long-term average. Bernanke sounded "a little over-optimistic" but not far off, Behravesh said. "I don't think there is going to be a recession next year," Behravesh said, noting that housing accounts for only about 6% of the economy -- enough to slow growth significantly but not stop it. On the contrary, he said, consumers are spending more because of low 4.4% unemployment, decent income growth, rising stock wealth and lower fuel prices. And businesses are exporting more goods to faster-growing economies overseas. "All the bad signals coming out have to do with housing, and to a lesser extent autos," he said. "Basically, the rest of the economy is giving out reasonably good signals." Others foresee a darker picture next year, in which consumers pull back more sharply on spending because of rising unemployment, heavy debt and falling home prices. "I do think in the first part of next year we'll have a recession, and it could be a difficult one," said Charles W. McMillion, chief economist at MBG Information Services, an economic consultancy. McMillion pointed to the Labor Department's drastic lowering of its estimates of workers' wages and benefits in the spring and summer. According to the figures released yesterday, hourly compensation rose at a 2.6% annual rate in the third quarter, down from its earlier estimate of 3.7% growth. And the department said compensation fell at a 1.2% pace in the second quarter, a reversal of its earlier estimate of 6.6% growth. To financial markets, those figures looked like good news because stronger productivity growth and weaker compensation gains mean less inflationary pressure. That bolstered expectations that the Fed will hold interest rates steady at its policymaking meeting next week, and maybe lower them next year. But McMillion said consumers and the economy are likely to buckle in coming months. "Stagnant productivity and falling wages is not a healthy combination," he said. http://www.washingtonpost.com/wp-dyn/content/article/2006/12/05/AR2006120501 424.html <http://www.washingtonpost.com/wp-dyn/content/article/2006/12/05/AR200612050 1424.html>
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