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August 28, 2007 > Positive reports suggest US economy was stable before credit crunch

Positive reports suggest US economy was stable before credit crunch

By Jeannine Aversa, AP Economics Writer

WASHINGTON (AP), Aug 24 _ New-home sales turned up and factory orders soared in July, suggesting the U.S. economy was on stable footing before a credit crunch took a turn for the worse.

The Commerce Department reported Friday that sales of new homes rose 2.8 percent to a seasonally adjusted annual rate of 870,000 units. The increase came after a 4 percent drop in June.

Another report from the department showed that orders placed with factories for big-ticket goods jumped 5.9 percent in July, the most in 10 months.

The latest batch of economic news was better than analysts had expected. They were forecasting home sales to fall and calling for a much smaller, 1 percent gain in factory orders.

On Wall Street, the reports cheered investors who have been consumed by worry in recent weeks about the country's financial health amid spreading credit troubles. The Dow Jones industrials vaulted 142.99 points to close at 13,378.87.

The housing report showing the July sales boost comes as credit standards have been tightening on home mortgages. Credit problems took a turn for the worse in August, making it even harder for some buyers to get financing. That means home sales in the coming months will likely show renewed weakness, economists said.

``Sales in August will face significant headwinds from further tightening in credit conditions, reduced availability of mortgage credit as many lenders shuttered their doors and upward pressure on mortgage rates, especially for non-conforming jumbo loans'' of more than $417,000 (euro306,000), predicted Brian Bethune, economist at Global Insight.

The improvement in overall sales did not change the big picture of the housing market, which has been suffering through a deep slump for more than a year. Sales are down 10.2 percent from last year, and the weakness is expected drag on into next year.

In the manufacturing report, gains were widespread, indicating that capital spending _ a key ingredient of a healthy economy _ had gained momentum. Orders increased for machinery, automobiles, metal products, airplanes and communications equipment. That blunted a drop in demand for computers, as well as electrical equipment and appliances.

Fears that the painful housing slump and credit crunch could hurt the economy have gripped Wall Street investors in recent weeks, causing stocks to swing wildly.

Credit is the economy's life blood. If it becomes too hard to get, spending and investment by people and businesses can stall, short-circuiting the economic growth.

``The downside risks to growth have increased appreciably,'' Fed Chairman Ben Bernanke and his colleagues concluded on Aug. 17. It was a much more sober assessment than they had offered just 10 days earlier when they met to examine economic conditions and interest rates. Against this backdrop, the central bank sliced the rate it charges banks for loans, a narrowly tailored move aimed at propping up sagging financial markets.

If problems persist, the Fed could opt for more aggressive action: reducing an important interest rate, called the federal funds rate, on or before Sept. 18, the Fed's next regularly scheduled meeting. The Fed has not cut this rate in four years. It is the Fed's main tool for influencing overall economic activity.

The funds rate, the interest banks charge each other on overnight loans, has stayed at 5.25 percent for more than a year. A rate cut would bring lower interest rates for millions of people and businesses.

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On the Net:

New-home sales and durable goods reports:
https://www.esa.doc.gov/ei.cfm

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