Dark clouds over US economy

IT'S not always sunny in Philadelphia. The Federal Reserve Bank of Philadelphia has reported severe dark clouds over the area's factory sector.

The central bank's general business activity index plunged to a reading of minus 30.7, a level usually not seen unless the US is in recession.

Manufacturers reported contractions in orders, shipments, order backlog and employment.

The Philly Fed pointed out the survey was taken from August 8-16, a time of extreme market volatility when investors, businesses and voters reacted negatively to the S&P downgrade of US debt, questions about the US banking system and the euro-zone debt drama.

But the new orders index has been weak for three months, meaning Philadelphia-area manufacturers were struggling with weak demand well before Washington leaders took the federal government up to the brink of default.

And the factory heartbreak isn't confined to the City of Brotherly Love. On Monday, the Fed Bank of New York also reported a surprise drop in its factory survey.

The news outside of manufacturing is also disturbing for the third-quarter economic outlook.

Sales of existing homes unexpectedly fell by 3.5 per cent in July to an annual rate of just 4.67 million, the lowest selling pace since last November.

Meanwhile, consumers who still were buying in early August are contending with a severe budget squeeze thanks to rising prices -- and not just from food and energy.

Total consumer prices were up 3.6 per cent in the year ended in July, and even without food and fuel, core prices increased 1.8 per cent, an acceleration from 0.8 per cent at the end of 2010. With price gains outpacing weak nominal pay raises, real weekly earnings are down 1.3 per cent since their recent peak in October 2010.

Unless real incomes pick up, consumers will be hard-pressed to keep lifting their spending --especially since drops in equities and home prices are eroding wealth once again.

Thanks to the coming benefits of falling energy costs and expected increases in business spending, the US still looks to be able to avoid a second recession.

That, at least, is what Fed officials and government policymakers hope.

But with each new weak piece of data, the risks of a downturn increase.

Wall Street Jounal

hostgator coupon 2011