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Disappointing economic data signal bumpy recovery

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[September 26, 2009]  WASHINGTON (AP) -- A reminder that the path to an economic recovery will be a slow and bumpy one emerged Friday from weaker-than-expected data on durable goods orders and new home sales.

TRestauranthe reports "are a wake up call for anyone expecting a smooth transition to a strong economic recovery," said Paul Ashworth, senior U.S. economist for Capital Economics.

The durable goods figure caused some economists to lower their forecasts for third-quarter economic growth. Still, the volatility isn't unexpected as the economy struggles to arise from the worst recession since the 1930s.

"No one said this would be a smooth recovery," Benjamin Reitzes, an economist at BMO Capital

The reports also reflect the uncertainty that lies ahead as some government stimulus efforts wind down.

Even as the housing sector is recovering, for example, a tax credit for first-time buyers that's helped boost sales is set to expire Nov. 30. There's a bipartisan push on Capitol Hill to extend the credit, but prospects for the real estate market remain hazy.

Similarly, while the manufacturing sector has made gains, they're partly due to the Cash for Clunkers program that supplied buyer rebates but that ended last month.

And the banking system has managed to stabilize mainly because of extraordinary aid from the Federal Reserve and the Treasury, which are starting to rein in some of that financial support.

"The pilot is saying, fasten your seat belts, we're going to hit some turbulence," said Brian Bethune, chief U.S. financial economist for IHS Global Insight.

That message was reinforced by a Fed board member who warned Friday that the central bank can't wait for the economy to return to normal before raising interest rates again to fend off inflation.

And once it does start to boost rates, the Fed may need to act with "greater swiftness than is modern central bank custom," Fed member Kevin Warsh said in a speech in Chicago.

For now, the economy's improvement is coming mainly in spurts, rather than a continuous arrow up. Orders for durable goods, which are expected to last at least three years, dropped 2.4 percent in August, after rising a revised 4.8 percent in July, the Commerce Department said. Economists had expected a 0.5 percent increase, according to a survey by Thomson Reuters. It was the second drop in three months.

Most of the decline was due to a steep fall in orders for airplanes and related parts. But economists were disappointed that business investment didn't pick up.

A category known as "core capital goods," a gauge of business spending on machinery and computer equipment, fell 0.4 percent, its second straight drop. It fell 1.3 percent in July.

Many economists hope business investment, along with growing exports, a turnaround in housing and government spending will drive the recovery. Consumer spending, which accounts for 70 percent of the economy and has fueled previous rebounds, is expected to remain weak due to widespread job losses, sluggish income growth and tight credit.

The decline in core capital goods led some economists to temper their expectations for the third quarter. David Wyss, chief economist at Standard & Poor's, marked down his forecast for growth in the current July-September period to 2 percent, from 2.4 percent.

Bethune expects business spending to fuel economic growth in the third quarter, for the first time in 18 months, but less than previously expected.

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Fed policymakers said earlier this week that "economic activity has picked up," an improvement from last month, when they said economic activity was "leveling out." Those comments built on Chairman Ben Bernanke's declaration last week that the recession is "very likely over."

Sales of new homes inched up 0.7 percent last month to a seasonally adjusted annual rate of 429,000 from 426,000 in July, below economists' expectations. Sales have risen 30 percent from the bottom in January. Yet they remain about 70 percent below their peak of four years ago.

The Commerce Department report was the second straight disappointing sign for the housing market. The National Association of Realtors on Thursday said sales of previously occupied homes, which make up the bulk of the market, dipped 2.7 percent last month.

Builders continue to cut prices sharply to try to attract buyers. The median sales price of $195,200 was 9.5 percent below July's $215,600, the largest monthly drop on records dating to 1963.

Buyers, meanwhile, are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000 for first-time owners. Home sales must be completed by the end of November for buyers to qualify. Builders and real estate agents are pressing Congress for that credit to be extended.

On Wall Street, stocks fell. The Dow Jones industrial average dropped more than 42 points to 9,665.19, while broader indexes also dipped.

In the durable goods report, orders for commercial aircraft and parts, an especially volatile category, sank 42.2 percent in August after nearly doubling in July.

Excluding aircraft and other transportation goods, orders were flat in August - below analysts' expectations of a 0.5 percent rise. Transportation goods orders dropped 9.3 percent.


Boeing Co. said earlier this month that its August orders fell 11 percent, as weaker demand for air travel forces airlines to scale back plans to buy new planes.

Autos and auto parts orders posted a 0.4 percent gain in August, after rising 1.6 percent in July, according to the government data. That was less than many economists expected, given the 30 percent increase in auto sales in August due to the clunkers program, which provided rebates to consumers for trading in older cars. Some said auto orders might rise again in September as inventories are replenished.


AP Economics Writer Jeannine Aversa and AP Real Estate Writer Alan Zibel contributed to this report.

[Associated Press; By CHRISTOPHER S. RUGABER]

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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