Skip navigation
Newswire

WRAPUP 2-Gloomy US economic data refreshes recovery fears

(Adds stock market close)

By Anna Willard

WASHINGTON, Oct 25 (Reuters) - Plunging durable goods orders and growing consumer gloom raised new concerns about the U.S. economic recovery on Friday while housing offered a rare bright spot in the economic picture.

Orders for costly and long-lasting durable goods posted their largest drop in 10 months in September while consumer sentiment in October hit its lowest level in nine years, according to two separate reports.

Both were worse than had been expected by analysts.

"These numbers are very disturbing," Dana Johnson, head of research at Banc One Capital Markets in Chicago said after the release of the durable goods data.

"At best what you have here is a sputtering economy."

Stocks tumbled after that report but took comfort from later data showing the housing market is still buoyant, as homeowners take advantage of four-decade low interest rates. The blue-chip Dow Jones Industrial average ended the day up 126.6 points at 8,443.9.

Prices of U.S. Treasury bonds climbed as the durable goods and confidence data prompted investors to revive bets that the Federal Reserve could ease rates before the year's end.

The Fed is next due to discuss monetary policy on Nov. 6. Analysts have been split about whether the central bank will move at that meeting but many say this data may now tilt the Fed in favor of a cut.

"Fed officials are apt to be disturbed by this news, and therefore sentiment in favor of a 50-basis-point (half a percentage point) rate cut on Nov. 6 should be rising," Goldman Sachs said in a research note.

BUSINESS OUTLOOK WEAK

The Commerce Department said durable goods orders, which, along with next week's employment numbers, are seen as pivotal for the Fed's decision-making process, fell 5.9 percent in September, pulled down by weak demand for cars and aircraft equipment. Excluding transportation, orders fell 1.0 percent.

The often volatile report showed weakness in many areas outside transportation, providing evidence that a sustained pick-up in business investment -- cited by the Fed as crucial to the recovery -- has not yet emerged.

Orders for computer and electronic equipment fell 6.0 percent and communications equipment orders tumbled a record 52.0 percent.

Machinery orders also declined and nondefense capital goods orders, seen as a proxy for capital spending by businesses, posted the largest drop since December 1997.

Even without aircraft, nondefense capital goods orders were down by 6.6 percent.

"Basically the business hesitation that started in June, has got worse. The business sector is already preparing themselves for a weaker outlook," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets in New York.

Pressure on corporate profits, accounting scandals and uncertainty over a potential war with Iraq are all undermining business confidence and making managers more cautious when making investment decisions.

CONSUMERS WORRIED TOO

With the boardroom mood still bleak, consumer spending -- which drives about two-thirds of the economy -- has been mainstay of the recovery from last year's recession. But there are signs the confidence of U.S. consumers is also shaky.

The University of Michigan's final October consumer sentiment index fell to 80.6 from 86.1 in September. That was lower than forecasts for a reading of 81.1.

"Consumer attitudes are very fragile. However, there is only scattered evidence that these poor assessments of economic conditions are having any negative influence on consumer spending," said Steven Wood, chief economist at FinancialOxygen in Walnut Creek, Calif.

Some analysts are concerned the flurry of spending spurred by a wave of mortgage refinancing as consumers cashed in on home equity and rushed to the shopping malls may soon slow.

HOUSING BRIGHT SPOT

Homebuyers continued to provide the one ray of sunshine in an otherwise uncertain economic outlook as they continued to take advantage of the lowest mortgage rates since the 1960s.

The Commerce Department said sales of new U.S. homes rose to a record level in September. New single-family home sales climbed 0.4 percent to a seasonally adjusted annual rate of 1.021 million units last month from an upwardly revised 1.017 million unit pace in August.

A separate report on Friday showed existing homes sales were strong last month as well. The National Association of Realtors said existing home sales rose 1.9 percent in September to a 5.40 million unit annual rate.

New home sales were strong in the Northeast, rising 94.2 percent to their highest level since January 1997, and in the West, where activity increased 2.2 percent.