Economy Shows Signs of Vulnerability

Thursday, 30 Jan 2014 02:07 PM

By Dan Weil

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While the government reported Thursday that economic growth totaled 3.2 percent annualized in the fourth quarter, there are signs of weakness under the surface.

The housing market is starting to show some cracks. New home sales dropped 7 percent to a 414,000 annualized rate in December amid rising interest rates and extremely cold weather in much of the country.

Editor’s Note: 18.79% Annual Returns . . . for Life?

The National Association of Realtors reported Thursday that its pending home sales index, based on contracts signed, fell 8.7 percent last month, the biggest plummet since May 2010.

"Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers," NAR chief economist Lawrence Yun said in a statement, Reuters reports.

Mark Zandi, chief economist at Moody's Analytics, says the housing sector may pose the biggest threat to his forecast of 3 percent GDP growth this year.

"We need to see more home sales, more housing construction," he told Yahoo. "Housing is very interest-rate sensitive. If rates rise too far too fast, it short-circuits the housing recovery. Then we won't get the economic growth I am anticipating."

Recent employment data have been shaky, too. The economy added only 74,000 jobs in December. The labor force participation rate, which measures the proportion of people who are employed or looking for work, dipped to 62.8 percent last month, matching October's 35-year low.

"The medium- to long-term concern is labor-force participation," Vincent Reinhart, chief U.S. economist at Morgan Stanley, told Bloomberg. "Our population growth has slowed, fewer people want to work and productivity growth seems to have slowed."

The Labor Department reported Thursday that initial jobless claims rose 19,000 to a seasonally adjusted 348,000, the highest level in more than a month. And claims for the previous week were revised up by 3,000.

Much of the economy's strength in the third and fourth quarters last year (GDP grew 4.1 percent in the third quarter) stemmed from increasing inventories, a development that is likely to prove temporary.

Stockpiles rose $127.2 billion in the fourth quarter and $115.7 billion in the third quarter, the biggest consecutive quarterly increases on record.

The Standard & Poor's 500 Index has fallen 2.8 percent so far this year and is on pace for its worst January performance since 2009.

Bill Fleckenstein, president of Fleckenstein Capital, says the market may be headed for a major tumble.

"The [price-to-earnings ratio] is 16, 17," he told CNBC. "Why would you pay 16 times for an S&P company? I don't care about where rates are, because rates are artificially suppressed. Why isn't that worth 11 or 12 times [earnings]? Just by that analysis, you'd be down by a quarter or 30 percent."

Editor’s Note: 18.79% Annual Returns . . . for Life?

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