December 4, 2022

Consumer Spending Rose Slightly in August

Consumers’ spending on goods and services rose 0.3 percent in August, the Commerce Department said on Friday. That was up from a 0.2 percent gain in July.

Income rose 0.4 percent in August, the best gain since February and up from a 0.2 percent July increase. Private wages and salaries rose 0.5 percent, while government wages and salaries rose 0.2 percent.

The government figures would have been higher if not for forced federal furloughs that reduced wages and salaries by $7.3 billion.

Consumer spending drives 70 percent of economic activity. Many analysts say the increases are not enough to accelerate economic growth in the third quarter from the 2.5 percent annual rate in the April-June quarter.

“With more money coming in, consumers spent a little, just a little, more freely,” said Jennifer Lee, senior economist at BMO Capital Markets.

Americans grew more pessimistic this month about the economy, their own finances and government budget policies, according to a survey of consumer confidence released Friday.

The University of Michigan says its final reading of consumer sentiment dropped to 77.5 in September from 82.1 in August. It was the second straight decline after confidence reached a six-year high of 85.1 in July.

Paul Ashworth, chief United States economist at Capital Economics, said the economy has been growing at an annual rate of 2 to 2.5 percent in the July-September quarter. Still, the pickup in August spending could signal stronger growth in the final three months of the year.

But other economists were less hopeful. Peter Newland, an economist at Barclays, said that the modest increase did not change the bank’s forecast for growth, at a 1.7 percent rate.

There are some signs that consumers may be better positioned to step up spending soon.

The number of people seeking unemployment benefits has sunk to its lowest point in six years because few companies are laying anyone off anymore. That has led some economists to predict that employers added 200,000 jobs or more jobs in September, the most since February.

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China’s G.D.P. Growth Slows as Government Changes Gears

HONG KONG — China’s new tough-love approach to overhauling its giant economy showed through in lackluster economic data released on Monday, underlining just how rapidly growth in the once-sizzling economy has cooled.

China’s economy grew 7.5 percent in the second quarter of this year, compared with the same period a year earlier, the National Bureau of Statistics reported. The figure was in line with economists’ expectations, but represented a progressive slowdown from 7.7 percent gross domestic product growth in the first quarter and 7.9 percent in the final three months of 2012.

Industrial output data for June, also released Monday, came in weaker than forecast, with an increase of 8.9 percent from a year earlier — down from 9.2 percent in May. The growth in fixed asset investment in urban areas, another key measure of economic activity, also slowed slightly during the first six months of the year.

On the upside, however, retail sales came in better than expected, rising 13.3 percent in June from a year earlier. The May reading was 12.9 percent.

The slowdown in the world’s second-largest economy after the United States has left some analysts concerned that China could lose yet more steam in the coming quarters, denting the ravenous demand for goods that has been a key support to global growth at a time when Europe and the United States are struggling to grow.

Xianfang Ren, an economist at IHS Global Insight in Beijing, wrote in a research note on Monday that China’s growth was “at risk of stalling,” and that “the downside risk for growth has become much more elevated now than a few months ago.”

Increasing signs that China is faltering have prompted a number of economists to downgrade their forecasts for the country. Zhang Zhiwei, China economist at Nomura, lowered his growth forecast for 2014 from 7.5 percent to 6.9 percent following Monday’s data release (he continues to project 7.5 percent growth for this year).

Officials in Beijing, however, continued to signal on Monday that they were comfortable with the slowdown, which comes as the country is preparing for a major structural overhaul designed to put future expansion on a more sustainable and balanced footing albeit at the price of more moderate growth.

Sheng Laiyun, the spokesman for the statistics bureau, said on Monday that the latest data were within the bounds of official expectations, though he acknowledged headwinds were buffeting the economy.

“Viewed over all, national economic performance in the first half of the year was generally stable, and the main indicators remain within the reasonable bounds for the annual forecast,” Mr. Sheng said during a news conference broadcast live on Chinese television. “But economic conditions are still complex and changeable.”

To a large degree, China’s recent cooling has been engineered by the authorities in Beijing, who are trying to steer the economy from an increasingly outdated growth model toward expansion that is more productive and sustainable.

While this slowdown has been happening for more than two years, a flood of comments from policy makers in recent months has made it increasingly clear that the new leadership that took the helm in March is serious about tolerating significantly slower growth for the foreseeable future in return for the longer-term gains of a more balanced economy.

Evidence of China’s cooling could prompt some limited policy shifts aimed at supporting especially pressured parts of the economy, analysts said. On Monday, for example, the governor of China’s central bank, Zhou Xiaochuan, and other officials said the government would extend more support to small businesses as part of its efforts to ignite new sources of growth.

Speaking at a conference about small business policy, Mr. Zhou outlined the challenges confronting policy makers.

“Currently, domestic and external economic conditions are unusually complicated, there are quite a number of destabilizing and uncertain factors, and the downward pressures on the economy are quite considerable,” Mr. Zhou said, according to a transcript of his comments on the Chinese government’s main Web site.

Still, few analysts expect the government to revert to heavy-hitting stimulus measures of the kind implemented after the financial crisis.

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Rising Chorus at the Fed to End Stimulus Sooner

The chairman, Ben S. Bernanke, said after the most recent meeting of the Fed’s policy-making committee last month that the central bank planned to gradually diminish its monthly bond purchases starting later this year and ending in the middle of next year, as long as economic growth continued.

But “about half” of the 19 officials who participate in the committee’s meetings “indicated that it likely would be appropriate to end asset purchases late this year,” according to the account of the June meeting that the Fed released after a standard delay.

The account does not imply an earlier endpoint for the bond-buying program. Only 12 of the 19 officials vote on policy, and proponents of a later end date still command a majority of the votes.

Moreover, the Fed has said repeatedly that the actual timing will depend on economic conditions, and in particular on evidence that the outlook for the labor market has improved substantially. That is a standard the economy has yet to meet, at least to the satisfaction of the majority that backs the bond-buying program.

“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” the account of the meeting said. “Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases.”

The Fed is adding $85 billion a month to its holdings of Treasury and mortgage-backed securities as part of its broader campaign to stimulate the economy and increase the pace of job growth. The centerpiece of that campaign is the Fed’s declared intention to hold short-term interest rates close to zero for at least as long as the unemployment rate remains above 6.5 percent.

Mr. Bernanke’s announcement that the Fed intended to dial back the pace of its purchases unsettled investors who have staked vast sums on the proposition that the Fed would keep trying to boost growth. Interest rates rose, in part because of the suggestion that the economy was doing better and in part because of the suggestion that the Fed intended to provide less help than expected.

A flurry of follow-up speeches by Fed officials helped to stabilize markets, but did not reverse the initial rise in interest rates.

The account published Wednesday makes clear that the Fed is not yet ready to curtail its bond buying. And it underscores again that the Fed has not fixed a date for the beginning of its deceleration. But it also revealed a surprising degree of internal opposition to the plan that Mr. Bernanke presented last month as representing a consensus of the Federal Open Market Committee.

The Fed has advanced the argument that it has not sought to stimulate the economy even more aggressively because the available methods have uncertain benefits and uncertain consequences, and it is best to move cautiously in dark rooms.

“The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy,” John Williams, president of the Federal Reserve Bank of San Francisco, wrote in a research paper published Tuesday that seeks to use economic models to justify the Fed’s instinctual caution. “Nothing could be further from the truth. Once one recognizes uncertainty, some moderation in monetary policy may well be optimal.”

Officials are particularly concerned that bond buying could destabilize financial markets, although the account of the June meeting said that so far, “The system’s purchases of longer-term assets do not appear to have had an adverse effect on the functioning of markets.”

The account also served notice that the Fed is no longer committed to the exit strategy it first described in 2011. As Mr. Bernanke said last month, most Fed officials no longer favor selling the Fed’s holdings of mortgage bonds as the economy gains strength. The account noted that “many of the details of the eventual normalization process would likely differ from those specified two years ago.”

Interestingly, however, Fed officials deferred discussion of that new plan, citing a need to focus on the current stimulus campaign, perhaps because they’ve learned the hard way in recent years that investors treat every future plan as if it will be implemented tomorrow.

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U.S. First-Quarter Growth Cut to 1.8 Percent

Economists cautioned against reading too much into the data given its backward-looking nature, but said it could weigh on the Federal Reserve as it considers whether the economy is strong enough for it to start scaling back its monetary stimulus.

Gross domestic product expanded at a 1.8 percent annual rate, the Commerce Department said in its final estimate on Wednesday. Output was previously reported to have risen at a 2.4 percent pace after a 0.4 percent stall speed in the fourth quarter.

Details of the report, which showed downward revisions to almost all growth categories, with the exception of home construction and government, could cast a shadow over the Fed’s fairly upbeat assessment of the economy last week.

“This gives (the market) hopes that the Fed won’t be tapering as aggressively,” said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.

Financial market conditions are tightening after Fed Chairman Ben Bernanke said last week the U.S. central bank would likely begin to slow the pace of its bond-buying stimulus later this year and stop the program in 2014.

Economists fear that could undercut growth, which has recently shown signs of picking up.

U.S. stock index futures pared gains on the report, while prices for longer-dated U.S. government bonds rallied, with the 30-year bond rising a full point. The dollar fell against the euro but gained against the yen.

Economists polled by Reuters had expected first-quarter GDP growth would be left unrevised at 2.4 percent. When measured from the income side, the economy grew at a 2.5 percent rate, slower than the fourth-quarter’s brisk 5.5 percent pace.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.6 percent pace rather than 3.4 percent. The revision largely reflected weak outlays on health care services.

Consumer spending grew at a 1.8 percent rate in the fourth quarter of last year.

Exports, previously reported to have grown, actually contracted at a 1.1 percent pace in the first quarter, cutting 0.15 percentage point from GDP growth. That likely reflects a slowdown in the global economy.

Business spending barely grew, with investment on nonresidential structures declining more sharply than previously reported. The drop in spending on nonresidential structures was the first in two years.

The pace of inventory accumulation was revised marginally down, adding more than half a percentage point to GDP growth. Excluding inventories, GDP grew at a 1.2 percent rate, the slowest in two years.

(Reporting by Lucia Mutikani; Additional reporting by Richarc Leong in New York; Editing by Andrea Ricci)

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Service Industry Expanded in April, but at Slower Pace

WASHINGTON (AP) — A survey of United States service companies showed that the industry expanded at a slower pace in April than in March, as companies reported less business activity and could not raise their prices.

The Institute for Supply Management said on Friday that its index of nonmanufacturing activity fell to 53.1 in April from 54.4 in March. Any reading above 50 indicates expansion. The report measures growth in industries that cover 90 percent of the work force, including retail, construction, health care and financial services.

The decline in the overall index suggested that some service companies may be starting to see less consumer demand, in part because of higher Social Security taxes.

April’s weakness was largely caused by a steep drop in a measure of prices, to 51.2 from 55.9 in March. Nearly 70 percent of the companies surveyed said they did not change their prices last month, while 10 percent reduced them.

A measure of business activity also declined. Still, a gauge of new orders was mostly unchanged, and businesses stepped up restocking, typically a sign that they expect consumer spending to pick up.

Growth in the service industry depends largely on consumers, whose spending drives roughly 70 percent of economic activity. Americans increased their spending from January through March at the most rapid pace in more than two years, despite the increase in Social Security taxes that kicked in on Jan. 1.

And other trends may offset some of the impact of the taxes this year. Consumers have cut their debts. Rising home values and stock prices have increased household wealth And average gas prices nationwide have dropped 27 cents from their peak this year to $3.52 a gallon, according to AAA.

In manufacturing, orders fell 4 percent in March, the largest amount in seven months, but a crucial category that signals business investment plans increased. The drop in factory orders reflected a plunge in the volatile category of commercial aircraft, the Commerce Department reported on Friday. Orders were up 1.9 percent in February. But in core capital goods, a category considered a proxy for business investment plans, orders rose 0.9 percent after a 4.8 percent decline in February and a 6.7 percent surge in January.

Weaker economies overseas and the impact of across-the-board government spending cuts have made businesses more cautious, dampening demand for manufactured goods. But even with the March decline, total orders stood at $467.3 billion, 43 percent above the recession low in March 2009.

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Americans Spent More and Made Less, Data Shows

WASHINGTON — Consumer spending rose in January as Americans spent more on services, with savings providing a cushion after income recorded its biggest drop in 20 years. Other economic reports showed consumer sentiment and manufacturing activity higher.

The Commerce Department said Friday that consumer spending increased 0.2 percent in January after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.

January’s increase was in line with economists’ expectations. Spending accounts for about 70 percent of American economic activity. When adjusted for inflation, it rose 0.1 percent after a similar increase in December.

Though spending increased in January, it was supported by a rise in services, probably related to utilities consumption. Spending on goods fell, suggesting some hit from the expiration at the end of 2012 of a 2 percent payroll tax cut. Tax rates for wealthy Americans also increased.

The impact is expected to be larger in February’s spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which are also being strained by rising gasoline prices.

Income tumbled 3.6 percent, the largest drop since January 1993. Part of the decline was payback for a 2.6 percent surge in December as businesses, anxious about higher taxes, rushed to pay dividends and bonuses before the new year.

A portion of the drop in January also reflected the tax increases. The income at the disposal of households after inflation and taxes plunged a 4 percent in January after advancing 2.7 percent in December.

With income dropping sharply and spending rising, the saving rate — the percentage of disposable income households are socking away — fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.

In another report on Friday, the Institute for Supply Management said its index of national factory activity rose to 54.2 points from 53.1 in January, topping economists’ forecasts for a pullback to 52.5. It was the highest level since June 2011, a sign that manufacturing is picking up as new orders continue to accelerate.

A reading above 50 points indicates expansion in manufacturing. The sector lost traction in the second half of last year and contracted in November in the wake of the damage in the Northeast caused by Hurricane Sandy.

The new orders index jumped to 57.8 from 53.3, making for the highest level since April 2011. The gauge of production gained to 57.6 from 53.6, while inventories edged up to 51.5 from 51.

But the employment component slipped to 52.6 points, from 54.

Separately, a survey released Friday showed that consumer sentiment rose in February as Americans were more optimistic that the jobs market would improve, even as confidence in fiscal policy was near all-time lows.

The Thomson Reuters University of Michigan’s final reading on the overall index on consumer sentiment rose to 77.6 points from 73.8 in January, topping expectations for attitudes to hold steady with February’s preliminary reading of 76.3.

Fewer Americans expected unemployment to rise, with survey respondents feeling slightly better about prospects for the economy.

The barometer of current economic conditions rose to 89 points from 85, while the gauge of consumer expectations gained to 70.2 from 66.6.

At the same time, 43 percent considered government economic policies to be poor and just 15 percent said the administration was doing a good job.

“Consumers find the blame-game for policy inaction a very unsatisfactory substitute for a concerted effort to improve the economy,” Richard Curtin, survey director, said in a statement.

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Fed Holds Steady on Strategy; Cites ‘Pause’ in Growth

WASHINGTON — The Federal Reserve, noting that economic growth had “paused” in recent months, said Wednesday that it would continue its efforts to stimulate the economy for as long as it deemed necessary.

The Fed attributed the pause in growth to the impact of Hurricane Sandy and other “transitory factors,” and it said that there were some signs of increased strength in areas including consumer spending and housing.

It affirmed the stimulus program it announced in December, saying that it would hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent and expand its holdings of Treasury securities and mortgage-backed securities by $85 billion each month.

“The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline,” the central bank said in a statement released after the conclusion of a two-day meeting of its policy-making committee.

The decision was supported by 11 of the 12 members of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, was the only dissenter, citing concerns about economic stability and inflation.

The Fed announcement came hours after the government reported that economic growth was unexpectedly weak in the fourth quarter. The Commerce Department said that the economy contracted by 0.1 percent, the first decline since 2009.

For the year, the economy grew by 2.2 percent – a decent pace in normal times, but not fast enough to help the millions of Americans still unable to find work.

The central bank is trying to increase economic activity by holding down interest rates and reducing the availability of safe assets like Treasury bonds, pushing investors to take larger risks and reducing borrowing costs for businesses and consumers.

Officials have pointed to increased sales of cars and homes as evidence that the policy is working, but they also have sought to temper expectations, warning in particular that monetary policy cannot offset reductions in government spending.

Indeed, the unemployment rate has not declined since the Fed launched its latest round of purchases in September. The rate was 7.8 percent in December, the same as four months before. The government will report the rate for January on Friday.

Fed officials also are wrestling with the potential costs of further expanding the central bank’s vast investment portfolio.

Some critics warn that the Fed’s efforts will loosen its control over inflation, but those warnings so far have come to nothing. Inflation has actually fallen below the 2 percent annual pace that the Fed regards as healthy, leading some officials to argue the economy could use a little more inflation.

Fed officials say that they are more concerned that asset purchases will destabilize financial markets, by removing safe assets from circulation, increasing the volatility of prices, or encouraging too much speculation.

In December, the Fed said that it would purchase Treasuries at an initial pace of $45 billion a month, adding to the commitment it made in November to buy $40 billion a month in mortgage-backed securities.

Mr. Bernanke underscored at a news conference following the announcement that the Fed might adjust the volume of purchases.

“The committee intends to be flexible in varying the pace of securities purchases in response to information bearing on the outlook or on the perceived benefits and costs of the program,” Mr. Bernanke said then.

At the time, some analysts saw evidence that the Fed already was contemplating the possibility that it was doing too much. That impression was reinforced by an account of the meeting released a few weeks later that said some officials wanted to reduce the pace of purchases by the summer.

But it would be relatively easy for the Fed to do less. The more worrying possibility is that the economy might need additional help, forcing the Fed to consider whether it is able to do more – and whether it should.

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Consumers Cut Spending in October

Consumer spending dropped 0.2 percent in October, the government said. That was down from an increase of 0.8 percent in September and was the weakest showing since May.

Income was flat in the month, following a 0.4 percent rise in September.

The government said work interruptions caused by the late October storm reduced wages and salaries by about $18 billion at an annual rate. Hurricane Sandy affected 24 states, with the most severe damage in New York and New Jersey.

Consumers may also be worried about automatic tax increases and spending cuts that will take effect in January if lawmakers and the Obama administration fail to strike a deal before then.

The depressed spending figures suggest economic growth are likely to be weak in the October-December quarter. Consumer spending drives nearly 70 percent of economic activity in the United States.

Discounting the effects of the storm, income growth would have risen a still-weak 0.1 percent. After-tax income adjusted for inflation fell 0.1 percent, while spending adjusted for inflation dropped 0.3 percent.

The saving rate edged up slightly, to 3.4 percent of after-tax income in October, compared with 3.3 percent in September.

The government reported Thursday that the overall economy grew at an annual rate of 2.7 percent in the July-September quarter, an improvement from the 2 percent rate of growth initially estimated. However, economists believe the acceleration in activity will be short-lived.

Many of them predict growth is slowing in the current October-December quarter to less than 2 percent, a rate that is too weak to make a significant dent in unemployment. But they expect growth to rebound in the New Year when the rebuilding phase begins in the Northeast.

In October, spending at retail businesses fell 0.3 percent, the first drop after three months of gains. Auto sales dropped 1.5 percent, the biggest decline in a year.

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Today’s Economist: Casey B. Mulligan: A Keynesian Blind Spot


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The decline of home construction is not the primary reason that our labor market remains depressed: Keynesian policies are.

Today’s Economist

Perspectives from expert contributors.

If we accept that the housing sector was overbuilt by 2006, then it might seem inevitable that a recession would follow as the housing sector downsized, workers shifted from construction to other industries and workers moved from overbuilt regions to other places in America.

But as Paul Krugman points out in his “End This Depression Now!” the recession of 2008-9 did not have many industries that were growing, let alone growing as a consequence of reallocation away from home construction.

Moreover, transitions between industries and regions have happened before, but happened gradually as demographic and other trends slowly but powerfully altered the composition of economic activity. By comparison, this recession came on suddenly.

To put it another way: for every worker that construction lost between 2007 and 2010, the rest of the economy lost at least another five workers, rather than gaining workers. I agree with Professor Krugman and other opponents of the “sectoral shifts theory” that something must have happened — in less than a year or two — that profoundly affected practically all industries and practically every region.

But just because sectoral shifts are at best a small part of what happened does not mean that huge government subsidies would take the labor market back to what it was before the recession. A Keynesian-style demand collapse is not the only aggregate event that could happen or did happen.

In my new book, I explain how, in the matter of a few quarters of 2008 and 2009, new federal and state laws greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.

Economists normally think that eroding incentives (as they call it, raising marginal labor income tax rates) depresses the labor market rather than expanding it, and that it would be tough for the labor market to get back to its 2007 form without returning incentives to what they were back then.

Yet Professor Krugman asserts that he would end this depression now with an even bigger stimulus — with more help for the poor and unemployed — that would further erode incentives and further penalize success.

Remarkably, “End This Depression Now!” says nothing about marginal tax rates or incentives to work, either as they actually evolved or as they would appear in Professor Krugman’s ideal stimulus. Nor does the book explain why economists or anyone else should ignore sharp marginal tax-rate increases, or why paying people for not working would have nearly the expansionary effect of military buildups and the like. (These absences are conspicuous to economists who are familiar with Professor Krugman’s academic work on how excessive debts harm debtor incentives.)

“End This Depression Now!” is full of interesting and relevant observations, but don’t expect its author to mention, let alone appreciate, a non-Keynesian explanation for any of them.

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Confidence Rises Sharply, but Home Prices Fall

A monthly survey released Tuesday shows consumers’ confidence in the economy in December surged to the highest level since April and was near a post-recession peak.

But a separate private report said home prices in most major cities in the United States fell for the second straight month in October.

The New York-based Conference Board said that its Consumer Confidence Index rose almost 10 points to 64.5, up from a revised 55.2 in November. Analysts had expected 59.

The surge builds on another big increase in November, when the index rose almost 15 points from the month before.

Improving confidence is in line with retail reports of a decent holiday shopping season. Still, the December confidence reading is below the 90 level that indicates an economy on solid footing.

Economists watch the confidence numbers closely because consumer spending — including items like health care — accounts for about 70 percent of economic activity in the United States.

Still, the Standard Poor’s/Case-Shiller index showed prices dropped in October from September in 19 of the 20 cities tracked, reflecting the typical autumn slowdown after the peak buying season.

Prices in a majority of cities declined for the second straight month. Before that, they had risen for five consecutive months in at least half of the cities tracked.

Atlanta, Detroit and Minneapolis posted the biggest monthly declines. Prices in Atlanta and Las Vegas fell to their lowest points since the housing crisis began.

Prices rose in Phoenix after three straight monthly declines.

The Case-Shiller index covers cities that hold half of all homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The monthly data are not seasonally adjusted.

David M. Blitzer, chairman of S.P.’s index committee, said steep price drops in cities such as Atlanta, Chicago, Cleveland, Detroit and Minneapolis were particularly worrisome because their gains earlier this season were strong.

“Atlanta and the Midwest are regions that really stand out in terms of recent relative weakness,” Mr. Blitzer said. “These markets were some of the strongest during the spring/summer buying season.”

Americans are generally reluctant to purchase a home more than two years after the recession officially ended. High unemployment and weak job growth have deterred many would-be buyers. Even the lowest mortgage rates in history haven’t been enough to lift sales.

Sales of previously occupied homes are barely ahead of 2008’s dismal figures, which were the worst in 13 years. And sales of new homes this year will likely be the lowest since the government began keeping records a half century ago.

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