Weak US job market weighing on broader economy

[June 22, 2012]  WASHINGTON (AP) -- The sluggish job market is weighing on the U.S. economy three years after the Great Recession ended. And the signs suggest hiring may not strengthen any time soon.

A measure of the number of people applying for unemployment benefits over the past month has reached a six-month high, the government said Thursday. The increase suggests that layoffs are rising and June will be another tepid month for hiring.

Sales of previously occupied homes fell in May. And manufacturing activity in the Philadelphia region contracted for the second straight month in June.

The gloomy economic data echoed a more pessimistic outlook from the Federal Reserve issued Wednesday.

The reports also contributed to a sharp decline in stock prices. The Dow Jones industrial average fell 251 points to close at 12,574. The Standard & Poor's 500 index and the Nasdaq composite both ended the day down more than 2 percent.

"It appears the slow-growth expansion will be slower," said John Silvia, chief economist at Wells Fargo Securities, in a note to clients.

Thursday's raft of economic reports showed:

- Applications for unemployment benefits dipped last week to 387,000, from an upwardly revised 389,000 the previous week, the Labor Department said. The four-week average, a less volatile measure, rose to 386,250. That is the highest level since December. When applications for unemployment benefits top 375,000, hiring generally remains too weak to rapidly lower the unemployment rate.

- Home sales fell 1.5 percent in May from April to a seasonally adjusted annual rate of 4.55 million, the National Association of Realtors said. Sales are up 9.6 percent from a year ago. That suggests that the housing market is slowly improving. But the annual sales rate is well below the 6 million that economists consider healthy.

- The Philadelphia Federal Reserve Bank said its index of regional manufacturing activity fell sharply to -16.6 from -5.8. That's the lowest level in nearly a year. A reading below zero indicates contraction. Measures of new orders and shipments also plummeted.

- A gauge of future U.S. economic activity rose in May to its highest level in four years, one of the few positive signs Thursday. The Conference Board's index of leading economic indicators increased to 95.8. That's the highest level since June 2008, which was six months into the recession. Still, before the recession, the index routinely topped 100.

The generally bleak news came a day after the Fed downgraded its outlook for growth and took another step to try and jolt the economy.

The Fed now expects growth of just 1.9 percent to 2.4 percent for the year. That's half a percentage point lower than its previous estimate in April. And it thinks the unemployment rate, now 8.2 percent, won't fall much further in 2012.

To try to boost growth and hiring, the Fed said it would extend a program intended to drive down long-term U.S. interest rates. Fed Chairman Ben Bernanke hopes that will encourage more borrowing and spending.

Hiring slowed sharply in April and May, raising concerns about the strength of the recovery. Employers have added an average of only 73,000 jobs a month in April and May. That's much lower than the average of 226,000 added in the first three months of this year.

Some economists warned that the weaker job market may have started to affect home sales, which until recently had been showing modest improvement.

Purchases made by first-time buyers, who are critical to a housing recovery, slipped in May. And sales fell in every region except the Midwest.

"Not a surprise that existing home sales took a step back in May," said Jennifer Lee, an economist at BMO Capital Markets. "Softening job growth could slow the housing recovery."

One positive sign in the report: The supply of homes for sale remains low. The inventory of unsold homes in May was just 2.49 million, roughly the same as in April. It would take only about six months to exhaust the supply at the current sales pace. Not since 2006, when the housing market was booming, has the supply been so low relative to the pace of home sales.

A low supply typically encourages more people to put homes up for sale. That generally improves the overall quality of the homes on the market, which drives prices higher.

The weaker manufacturing activity in the Philadelphia region likely reflects the worsening debt crisis in Europe, which has dampened demand for U.S. exports.

Despite the plunge in the survey, companies said they're more optimistic about business conditions in the six months. A gauge of future expectations rose to 19.5 in June from 15 the previous month.

Economists cautioned that the Philly Fed index is volatile and does not always reflect the state of manufacturing nationwide.

Paul Dales, an economist at Capital Economics, noted that the index fell sharply in August but bounced back into positive territory two months later.

"The weight of the evidence therefore suggests that the easing in demand in Europe and Asia is taking a toll on the U.S. economy" but that it's still growing, he said in an email to clients.

[Associated Press; By CHRISTOPHER S. RUGABER]

AP Economics Writer Martin Crutsinger contributed to this report.

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