June 17, 2014

Off-balance recovery continues

The U.S. economy still is sending mixed signals as its off-balance recovery continues. Here is a look at some of the economic news out Tuesday....

The U.S. economy still is sending mixed signals as its off-balance recovery continues. Here is a look at some of the economic news out Tuesday:

Home construction

-6.5%: U.S. home construction dropped to a seasonally adjusted annual rate of 1.01 million new homes last month, the Commerce Department said Tuesday – down 6.5 percent from 1.07 million in April.

WHY: Many Americans still are struggling to afford new houses. Mortgage rates are higher than at this time last year and builders are selling fewer new homes but charging more for them.

IMPACT: As home construction has struggled to gain much traction this year, its ability to contribute as much to broader economic growth as it has in the past has been limited. Builders employ 1.49 million fewer workers than they did at the start of the Great Recession in December 2007, a loss of roughly 20 percent.

OUTLOOK: Experts expect housing to contribute positively to 2014 economic growth, but at a lower rate than the past two years. Apartments continue to be the strongest segment of the housing market, suggesting that more Americans will be renting instead of owning homes in the near future. And applications for building permits, a gauge of future activity, fell 6.4 percent in May to an annual rate of 991,000.

Consumer prices

+0.4%: U.S. consumer prices increased 0.4 percent in May – the biggest one-month jump since a 0.6 percent increase in February 2013, the Labor Department reported Tuesday. Over the past 12 months, consumer prices are up 2.1 percent.

WHY: The cost of food and gasoline showed big gains and airline fares jumped by the largest amount in 15 years. The cost of clothing, prescription drugs and new cars all also showed increases in May.

IMPACT: Even with the May price increases, inflation is still advancing at moderate rates around the 2 percent target set by the Federal Reserve, which has the job of managing interest rates to foster stable prices and maximum employment.

OUTLOOK: The Fed will update its economic forecasts on Wednesday and analysts are looking for the growth figure to be trimmed to reflect the very weak start to the year. Despite the weakness, which was related to a harsh winter, economists believe the economy will rebound to growth rates of 3 percent or better for the rest of this year.

CEO outlook

95.4: As optimism among chief executives of large U.S. companies grew, the Business Roundtable said Tuesday that its CEO outlook index rose to 95.4 in the second quarter, up from 92.1 in the first quarter. That is the highest level since the second quarter of 2012.

WHY: The U.S. economy has been adding jobs at a steady pace this year and the unemployment rate has fallen to 6.3 percent, a five-year low.

IMPACT: The positive sentiment among CEOs of some of the largest U.S. companies could bode well for hiring and growth. The proportion of CEOs expecting to hire in the next six months rose to 43 percent, up from just 37 percent in the first quarter. However, the percentage of CEOs planning to invest more in their businesses fell to 44 percent from 48 percent.

OUTLOOK: The CEOs forecast that the economy will grow at just a 2.3 percent pace in 2014. That would be better than last year’s 1.9 percent growth, but below many economists’ hopes at the beginning of this year that growth would reach 3 percent. Growth this year has been dragged down by harsh winter weather, which closed factories and kept consumers away from shopping malls and car dealers in the first quarter. Many analysts expect the economy contracted at a 2 percent annual rate from January through March.

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