March 28, 2024

Economic Outlook in U.S. Follows Home Prices Downhill

The Markeys have since patched together a semblance of their old life, opening a new stone-cutting shop. But they do not expect that they will ever recover financially from the loss of equity in their old home.

“For two years I kept thinking that things would get better,” Mr. Markey, 51, said as he stood in his empty store on a recent weekday. “Now I think the future doesn’t look so good.”

The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing.

There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.

That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.

Many say they believe that the bust has permanently changed their financial trajectory.

“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980.

In Orlando, a city that trades in upbeat fantasies, the housing crash has been particularly painful. The total value of area homes has fallen below the total mortgage debt on those homes, according to the real estate analytics firm CoreLogic. In the parlance of the real estate world, Orlando is underwater, a distinction matched by Las Vegas.

“I don’t know that it’s going to get better. We just have to get used to it,” said Sherry DeWeese, whose home in Ocoee, a northwestern suburb of Orlando, is worth less than she paid for it 13 years ago — and about a third of its value at the peak of the market. “It was nothing to buy whatever we wanted. Now we just think about what we really need.”

Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home.

This “wealth effect” is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure.

A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy.

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Retail Sales Rise, but Consumer Sentiment Hits 30-Year Low

Consumer sentiment worsened sharply in early August, falling to the lowest level in more than three decades, even though retail sales posted the biggest gains in four months in July, separate reports on Friday showed.

Consumer sentiment, which hit its lowest since 1980 when the economy was in recession, fell on fears of a stalled recovery combined with gloom from partisan bickering over government debt, the Thomson Reuters/University of Michigan’s consumer sentiment survey reported.

The preliminary August reading on the consumer sentiment index fell to 54.9 in early August, down from 63.7 in July, and has fallen for three months. The August reading was well below the median forecast of 63.0 among economists polled by Reuters.

However, retail sales climbed 0.5 percent in July, the biggest increase since March, after a revised 0.3 percent gain in June, according to the Commerce Department.

“People’s spending doesn’t always correspond with their mood,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn. “I doubt things are as weak as the sentiment readings suggest, but no doubt people will be cautious in August.”

High unemployment, stagnant wages and the protracted debate in Congress over raising the government debt ceiling alarmed consumers in the University of Michigan survey even before the downgrade of United States sovereign debt by Standard Poor’s. The consumer sentiment index registered most of the decline before the credit rating downgrade on Aug. 5.

“Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” the survey director, Richard Curtin, said in a statement.

“This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent. It was the realization that the government was unable or unwilling to act,” Mr. Curtin added.

Bad economic times were expected by 75 percent of all consumers in early August, just below the record peak of 82 percent in 1980. Buying plans for household durables and vehicles declined in early August, falling back to their recession-level lows.

“Obviously this is quite an ugly number,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

“How could you have hopes for anything less than what we got, with the markets being in turmoil, the fear, and the U.S. being downgraded? It took the wind out of the stock market a bit, but I don’t think it will be that meaningful.”

However, retail sales in July posted the biggest gain since March, tempering fears that the nation’s economy might be slipping back into recession.

The 0.5 percent increase was in line with analysts’ forecasts and followed an upwardly revised 0.3 percent gain in June.

Excluding autos, sales increased 0.5 percent, well above forecasts for a 0.2 percent gain. The figures were bolstered by a 1.6 percent increase in gasoline station sales, in part reflecting the higher cost of fuel. Retail sales excluding autos, gasoline and building materials rose 0.4 percent.

In another report, the Commerce Department said business inventories rose slightly less than expected in June, suggesting firms remained cautious about future demand at the end of the second quarter. Inventories climbed 0.3 percent, after a downwardly revised 0.9 percent rise in May, the report said. Economists had expected a rise of 0.5 percent in June.

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