US economy showing strength as spending cuts loom

In this photo from Jan. 11, 2013, a con­struc­tion worker works at a new home under con­struc­tion in Chicago. U.S. new-home sales jumped in Jan­u­ary from the pre­vi­ous month to the high­est level since July 2008, a sign that the hous­ing recov­ery is accel­er­at­ing. (Asso­ci­ated Press file | Nam Y. Huh)

CHRISTOPHER S. RUGABER

AP Eco­nom­ics Writer

WASHINGTON — Even with auto­matic spend­ing cuts loom­ing, the out­look for the U.S. econ­omy bright­ened a bit Tues­day after reports showed that Amer­i­cans are more con­fi­dent and are buy­ing more new homes.

Home prices are also ris­ing steadily, and banks are lend­ing more. Such improve­ments sug­gest that the econ­omy is resilient enough to with­stand the deep gov­ern­ment cuts that will kick in Friday.

That’s espe­cially encour­ag­ing because uncer­tainty over the fed­eral bud­get could per­sist for months.

“The stars are lin­ing up for stronger pri­vate sec­tor growth this year,” said Craig Alexan­der, chief econ­o­mist at TD Bank.

Sales of new homes jumped nearly 16 per­cent in Jan­u­ary to their high­est level in 4½ years, adding momen­tum to the hous­ing recov­ery. Con­sumer con­fi­dence rose in Feb­ru­ary after three months of declines. And home prices increased in Decem­ber from the same month in 2011 by the largest amount in more than six years.

The upbeat eco­nomic news con­tributed to a rally on Wall Street. The Dow Jones indus­trial aver­age jumped more than 100 points.

Con­sumers still face numer­ous bur­dens. Among them is a sharp increase in gas prices. The national aver­age for a gal­lon, $3.78, has surged 44 cents in a month.

And Social Secu­rity taxes rose 2 per­cent­age points begin­ning Jan. 1. This year, the increase will cost a typ­i­cal house­hold that earns $50,000 about $1,000. Income taxes for the highest-earning Amer­i­cans also rose.

Both fac­tors could reduce over­all spending.

On Fri­day, about $85 bil­lion in auto­matic spend­ing cuts are to kick in, and there’s lit­tle sign that the White House and Con­gress will reach a bud­get deal to avoid them. The cuts will cause fur­loughs and tem­po­rary lay­offs of gov­ern­ment work­ers and con­trac­tors and sharply reduce spend­ing on defense and domes­tic programs.

For about 2 mil­lion long-term unem­ployed, ben­e­fits now aver­ag­ing $300 a week could shrink by about $30. Pay­ments that sub­si­dize clean energy, school con­struc­tion and state and local pub­lic works projects could be cut. Low-income Amer­i­cans seek­ing heat­ing or hous­ing aid might face longer waits.

Over­all, the tax increases and spend­ing cuts could shave up to 1.2 per­cent­age points from growth this year, econ­o­mists esti­mate. Alexan­der esti­mates that with­out the spend­ing cuts or tax increases, the econ­omy would expand more than 3 per­cent this year. Instead, he pre­dicts growth of only 2 percent.

But growth should accel­er­ate later this year as the effects of the gov­ern­ment cut­backs ease, he and other econ­o­mists say. And sev­eral reports Tues­day sug­gest that the economy’s under­ly­ing health is improv­ing despite the prospect of lower gov­ern­ment spend­ing and fur­ther bud­get stalemates:

• The Stan­dard & Poor’s/Case-Shiller 20-city home price index rose 6.8 per­cent in Decem­ber from a year ear­lier. That was the biggest year-over-year increase since July 2006. Ris­ing home prices tend to make home­own­ers feel wealth­ier and encour­age more spend­ing. They also cause more peo­ple to buy before prices rise fur­ther. And banks are more likely to pro­vide mort­gages if they fore­see higher home prices.

• Con­sumer con­fi­dence rose after three months of declines, accord­ing to the Con­fer­ence Board, a busi­ness research group. Con­fi­dence had plunged in Jan­u­ary after higher taxes cut most Amer­i­cans’ take-home pay. The rebound, though, sug­gests that some con­sumers have begun to adjust to smaller pay­checks. The con­sumer con­fi­dence index rose to 69.6 in Feb­ru­ary from 58.4 in Jan­u­ary. That’s higher than last year’s aver­age of 67.1.

• Bank lend­ing rose 1.7 per­cent in the October-December quar­ter, the Fed­eral Deposit Insur­ance Corp. said. It was the sixth rise in seven quar­ters. Banks made more com­mer­cial and indus­trial loans to busi­nesses and auto loans to con­sumers. More lend­ing means the Fed­eral Reserve’s pol­icy of keep­ing inter­est rates at record lows will ben­e­fit more peo­ple. Chair­man Ben Bernanke reit­er­ated to Con­gress on Tues­day that the Fed’s efforts are help­ing the econ­omy and sig­naled that they will continue.

• Sales of new homes rose to a sea­son­ally adjusted annual rate of 437,000, the Com­merce Depart­ment said. That’s the high­est level since July 2008. The gain will likely encour­age more con­struc­tion. Higher sales are keep­ing the sup­ply of new homes low, even as builders have tried to keep up. At the cur­rent sales pace, it would take only 4.1 months to exhaust the sup­ply of new homes for sale. That’s the low­est such fig­ure in nearly eight years.

“Builders are not putting up homes fast enough to meet under­ly­ing demand,” said Patrick New­port, an econ­o­mist at IHS Global Insight.

New homes have an out­size impact on the econ­omy. Each home built cre­ates an aver­age of three jobs for a year and gen­er­ates about $90,000 in tax rev­enue, accord­ing to data from the National Asso­ci­a­tion of Homebuilders.

Con­struc­tion hir­ing has picked up in recent months. The indus­try has gained 98,000 jobs since Sep­tem­ber, its best stretch since the spring of 2006 — before the hous­ing bub­ble burst.

Posted by AP News on Feb 26 2013. You can follow any responses to this entry through the RSS Feed. Comments can be made below.