Factory activity in the US Mid-Atlantic region slumped to a nearly 2-1/2 year low in August and home resales unexpectedly dropped in July, dashing hopes for a quick revival in economic growth. Other data on Thursday also pointed to a darker outlook for the economy, with consumer inflation rising at its fastest pace in four months in July and more Americans than expected claiming new jobless benefits last week.
Stock markets world-wide tumbled on the weak economic data, which stoked concerns that recovery is on the rocks. Still, economists did not believe that the sharp drop in manufacturing activity signalled that the US economy was sliding back into recession.
"Without a strong rebound in the coming months this will be taken as a very worrying development for policymakers charting the outlook for the second half of the year," said Peter Newland, a senior economist at Barclays Capital in New York. "That said, 'hard' data so far available for the third quarter have taken a clearly stronger tone and timely jobless claims data are not indicative of a dramatic weakening in the economy," he added.
So far, data ranging from retail sales to industrial production suggest the economy found some momentum early in the third quarter after barely growing in the first half of the year. New York Federal Reserve President William Dudley said on Thursday the risk of a double-dip recession is "quite low".
"The risks have risen a little bit, but I think we very much still expect the economy to recover. We expect ... growth to be significantly firmer than it was during the first half of the year," he told New Jersey business leaders. The Philadelphia Federal Reserve Bank's business activity index plummeted to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July. That was much worse than economists' expectations for a reading of plus 3.7. Any reading below zero indicates a contraction in the region's manufacturing. "This report clearly reflects the fact that businesses cut their outlook as a result of the debt limit crises and the resulting downgrade of the US credit rating," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.
"I would not read too much into this in terms of the outlook on the economy since manufacturing had been on the rebound in autos and exports and the economy was stuck in first gear for two years." A second report showed sales of previously owned homes fell 3.5 percent to an annual rate of 4.67 million units, the lowest in eight months. Economists had expected home resales to rise to a 4.90 million-unit pace.
Separate data from the Labour Department showed initial claims for state unemployment benefits increased 9,000 to 408,000. Another report from the department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June. Gasoline, which rose 4.7 percent after falling 6.8 percent the prior month, accounted for about half of the rise in CPI last month. But core CPI - excluding food and energy - rose 0.2 percent after rising 0.3 percent in June.
Morgan Stanley cut its global growth forecast and said that the United States and its major export partner the eurozone were "dangerously close to recession." In a research note that spooked investors, it lowered its US estimate to 1.8 percent GDP growth for 2011 from 2.6 percent and for next year to 2.1 percent from 3.0 percent. US stocks were down about 4 percent, while Treasury debt prices rose sharply. The dollar rallied on safe-haven flows. The Federal Reserve last week promised to keep interest rates near zero at least until mid-2013 to boost growth and said the outlook for inflation over the medium-term was subdued.
The claims data covers the survey week for August nonfarm payrolls. Claims dropped by 14,000 between the July and August survey periods, but there are fears that financial markets turbulence could have slowed hiring this month. "Initial claims were a bit higher than expected, indicating a generally sluggish trend for hiring although still better than where we stood during the second quarter," said Avery Shenfeld, economist at CIBC World Markets in Toronto.
Despite the spike in consumer inflation last month, which also reflected a 0.4 percent rise in food prices, inflation generally remains contained. New motor vehicle costs were unchanged after five straight months of hefty gains. This likely reflects an improvement in supplies as disruptions caused by the March earthquake in Japan fade. Motor vehicle production rebounded sharply in July. In the 12 months to July, core CPI increased 1.8 percent - the largest increase since December 2009. This measure has rebounded from a record low of 0.6 percent in October and Fed would like to see that closer to 2 percent.
Overall consumer prices rose 3.6 percent year-on-year, rising by the same amount for a third straight month. Within the core CPI basket, shelter costs rose 0.3 percent, the largest gain since June 2008, after advancing 0.2 percent in June. Shelter has increased since October as a persistently weak housing market drives Americans into renting. The increase in apparel prices slowed to 1.2 percent from June's 1.4 percent increase.
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