US growth anemic, debt row poses recession risk

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By Lucia Mutikani WASHINGTON 

(Reuters) - The economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising the risk of a recession if a standoff over the nation's debt does not end quickly.

Output increased at a 1.3 percent annual pace in the second quarter as consumer spending barely rose, the Commerce Department said on Friday. In the first three months of the year, the economy advanced just 0.4 percent, a sharp downward revision from the previously reported 1.9 percent gain.

"The economy essentially came to a grinding halt in the first half of this year," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "We did get side-swiped by some temporary factors which are fading, but it raises some concerns about the sustainability the recovery."

The weaker-than-expected second-quarter reading and downward revisions extending into last year underscored the frail state of the recovery, which economists said could fall off the rails if lawmakers do not raise the nation's $14.3 trillion borrowing limit and avoid a government default.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply in the second quarter, advancing at only a 0.1 percent rate -- the weakest since the recession ended two years ago.

Stocks on Wall Street fell on the data and the debt impasse on Friday, to record their worst week in a year. Prices for government debt rallied, while the dollar fell broadly.



FUNDAMENTAL SLOWDOWN?

The Obama administration has said it will run out of borrowing authority on Tuesday and could soon run out of cash, but talks aimed at raising the debt ceiling remain deadlocked.

"This should wake up those in Washington who still have their thinking caps on," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania. "There is no margin for error and a default that lasted any length of time could push us back into recession."

But any debt agreement would include budget cuts that could also weigh on growth. High Frequency Economics said in a note on Thursday that a deal to trim the U.S. deficit would likely shave government spending by about $70 billion, or one-half of a percentage point of GDP, in its first year.

Growth in the first half of 2011 was held back by a combination of bad weather, expensive gasoline and supply chain disruptions after the earthquake disaster in Japan.

With economic activity yet to show signs of perking up, even with gasoline prices off their highs and the Japan supply constraints easing, there is concern that some of the weakness might be fundamental and linger for a while.

While economists still expect growth to accelerate to about a 3 percent pace for the remainder of this year and next year, the risks are stacked to the downside.

Annual revisions to GDP data that take into account newly available source material, including tax returns, showed the economy lost steam in late 2010, before it ran into the temporary headwinds. Fourth-quarter growth was revised to a 2.3 percent rate from 3.1 percent.

The revisions also showed the 2007-2009 recession was much more severe than prior measures had found.
The downgrades help to explain why the economy has only regained a fraction of the more than 8 million jobs lost during the downturn.

Economists said the current bout of weakness reinforced views that the Federal Reserve will maintain its accommodative monetary policy stance for a while, but few think the central bank will spring to the economy's rescue if it can avoid it.

"In the immediate environment, with so much at stake on fiscal policy, I think the Fed wants to remain quietly on the sidelines, sorting out events and how the data plays out in the second half of the year," said Robert DiClemente, chief economist at Citigroup in New York.

JOLT FROM JAPAN

The U.S. central bank has held interest rates close to zero since December 2008, and it has bought $2.3 trillion in bonds in an effort to further spur the economy. Fed Chairman Ben Bernanke has opened the door to a further easing of monetary policy, but officials have said they are hesitant to act.

"It's a very high bar," Atlanta Federal Reserve Bank President Dennis Lockhart told CNBC on Friday.

The March earthquake in Japan severely disrupted U.S. auto output, which subtracted 0.12 percentage point from GDP growth in the second quarter.

The decline combined with high gasoline prices to weigh on retail sales as consumers were unable to find the vehicle models they wanted.

Future spending strength will depend on employment and confidence. So far, the immediate outlook is not promising.

The Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.7 in July from 71.5 in June, a separate report showed.

But economists are cautiously optimistic the jobs market will have started to improve somewhat in July after faltering badly in the last two months, although U.S. companies are still trying to hold the line on hiring to save costs.

Merck & Co said on Friday that it plans to slash thousands of jobs by late 2015 to wring out savings of up to $1.5 billion a year.

Nonfarm jobs likely rose 90,000 in July, according to a Reuters survey, after June's paltry 18,000 gain.
Growth in the second quarter was supported by a smaller trade deficit, a pick-up in home building and a healthy rise in business spending. Most encouraging was a lack of a big build-up in business inventories, which rose only modestly.

"Inventory building does not seem to be overdone, which sets us up for a good boost from manufacturing in the second half," said Moody's Analytics' Sweet.

Government spending was another drag on growth in the second quarter. Overall inflation slowed during the quarter, but underlying price pressures continued to build.

(Editing by Leslie Adler)

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European choice: Greek bailout Mark II – it’s a default !

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WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

The European debt crisis has evolved rather quickly since my last column, “Greece is Bankrupt” (July 2). The European leadership was clearly in denial. The crisis has lurched from one “scare” to another. First, it was Greece, then Ireland, then Portugal; and then back to Greece. On each occasion, European politicians muddled through, dithering to buy time with half-baked solutions: more “kicking the can down the road.” By last week, predictably, the crisis came home to roost. Financial markets in desperation turned on Italy, the euro-zone's third largest economy, with the biggest sovereign debt market in Europe. It has 1.9 trillion euros of sovereign debt outstanding (120% of its GDP), three times as much as Greece, Ireland and Portugal combined.

Over the next two weeks the EU must come up with a second Greek bailout which could be as high as £107billion on top of the £98billion in rescue loans agreed for Greece in May 

The situation has become just too serious, if contagion was allowed to fully play out. It was a reality check; a time to act as it threatened both European integration and the global recovery. So, on July 21, an emergency summit of European leaders of the 17-nation euro-currency area agreed to a second Greek bailout (Mark II), comprising two key elements: (i) the debt exchange (holders of 135 billion euros in Greek debt maturing up to 2020 will voluntarily accept new bonds of up to 15 to 30 years); and (ii) new loans of 109 billion euros (through its bailout fund and the IMF). Overall, Greek debt would fall by 26 billion euros from its total outstanding of 350 billion euros. No big deal really.

Contagion: Italy and Spain

By mid-July, the Greek debt drama had become a full-blown euro-zone crisis. Policy makers' efforts to insulate other countries from a Greek default, notably Italy and Spain, have failed. Markets panicked because of disenchantment over sloppy European policy making. For the first time, I think, investors became aware of the chains of contagion and are only now beginning to really think about them.

The situation in Italy is serious. At US$262bil, total sovereign claims by international banks on Italy exceeded their combined sovereign exposures to Greece, Ireland, Portugal and Spain, which totalled US$226bil. European banks account for 90% of international banks' exposure to Italy and 84% of sovereign exposure, with French & German banks being the most exposed. Italy & Spain have together 6.3 trillion euros of public and private debt between them. Reflecting growing market unease, the yield on Italy's 10-year government bonds had risen to 5.6% on July 20, and Spain's, to 6%, against 2.76% on German comparable bunds, the widest spread ever in the euro era.

Italy and Spain face different challenges. Spain has a high budget deficit (9.2% of GDP in 2010, down from 11.1% in 2009) the target being to take it down to 6% in 2011 which assumes high implementation risks. Its debt to GDP ratio (at 64% in 2011) is lower than the average for the eurozone. The economy is only gradually recovering, led by exports. But Spain suffers from chronic unemployment (21%, with youth unemployment at 45%), weak productivity growth and a dysfunctional labour market.



It must also restructure its savings banks. Spain needs to continue with reforms; efforts to repair its economy are far from complete and risks remain considerable. Italy has a low budget deficit (4.6% of GDP) and hasn't had to prop-up its banks. But its economy has barely expanded in a decade, and its debt to GDP ratio of 119% in 2010 was second only to Greece. Italy suffers from sluggish growth, weak productivity and falling competitiveness. Its weaknesses reflect labour market rigidities and low efficiency. The main downside risk comes from turmoil in the eurozone periphery.

Another decade of stagnation also poses a major risk. But both Spain and Italy are not insolvent unlike Greece. The economies are not growing and need to be more competitive. The average maturity of their debt is a reasonable six to seven years. But the psychological damage already done to Europe's bond market cannot be readily undone.

The deal: Europeanisation of Greek debt 

The new bailout deal soughts to ring-fence Greece by declaring “Greece is in a uniquely grave situation in the eurozone. This is the reason why it requires an exceptional solution,” implying it's not to be repeated. Most don't believe it. But to its credit, the new deal cuts new ground in addition to bringing-in much needed extra cash - 109 billion euros, plus a contribution by private bondholders of up to 50 billion euros by mid-2014. For the first time, the new framework included solvent counterparties and adequate collateral. For investors, there is nothing like having Europe as the new counterparty instead of Greece. This europeanisation of the Greek debt lends some credibility to the programme. Other new features include: (i) reduction in interest rates to about 3.5% (4.5% to 5.8% now) and extension of maturities to 15 years (from 7 years), to be also offered to Ireland and Portugal; (ii) the European Financial Stability Facility (EFSF), its rescue vehicle, will be allowed to buy bonds in the secondary market, extend precautionary credit lines before States are shut-out of credit markets, and lend to help recapitalise banks; and (iii) buy collateral for use in the bond exchange, where investors are given four options to accept new bonds carrying differing risk profiles, worth less than their original holdings.

The IIF (Institute of International Finance), the industry trade group that negotiated for the banks, insurance funds and other investors, had estimated that one-half of the 135 billion euros to be exchanged will be for new bonds at 20% discount, giving a savings of 13.5 billion euros off the Greek debt load. Of the 109 billion euros from the new bailout (together with the IMF), 35 billion euros will be used to buy collateral to serve as insurance against the new bonds in exchange, while 20 billion euros will go to buy Greek debt at a discount in the secondary market and then retiring it, giving another savings of 12.6 billion euros on the Greek debt stock.

Impact of default

Once again, the evolving crisis was a step ahead of the politicians. There are fears that Italy and Spain could trip into double-dip recession as global growth falters, threatening the debt dynamics of both countries. This time the IMF weighed in with serious talk of contagion with widespread knock-on effects worldwide. Fear finally struck, forcing Germany and France to act, this time more seriously. The first reaction came from the credit rating agencies. Moody's downgraded Greece's rating three notches deeper into junk territory: to Ca, its second-lowest (from Caa1), short of a straight default. Similarly, Fitch Ratings and Standard & Poor's have cut Greece's rating to CCC.

They have since downgraded it further. They are all expected to state Greece is in default when it begins to exchange its bonds in August for new, long-dated debt (up to 30 years) at a loss to investors (estimated at 21% of their bond holdings). The rating agencies would likely consider this debt exchange a “credit event”, but only for a limited period, I think. Greece's financial outlook thereafter will depend on whether the country would likely recover or default again. History is unkind: sovereigns that default often falters again.

What is also clear now is the new bailout would not do much to reduce Greece's huge stock of sovereign debt. At best, the fall in its debt stock will represent 12% of Greece's GDP. Over the medium term, Greece continues to face solvency challenges. Its stock of debt will still be well in excess of 130% of GDP and will face significant implementation risks to financial and economic reform. No doubt the latest bailout benefitted the entire eurozone by containing near-term contagion risks, which otherwise would engulf Europe. It did manage to provide for the time being, some confidence to investors in Ireland, Portugal, Spain and Italy that it's not going to be a downward spiral. But the latest wave of post-bailout warnings have reignited concerns of contagion risks and revived investor caution.

Still, the bailout doesn't address the very core fiscal problems across the eurozone. This is not a comprehensive solution. It shifted additional risks towards contributing members with stronger finances and their taxpayers as well as private investors, and reduces incentives for governments to keep their fiscal affairs under strict check. This worries the Germans as it weakens the foundation of currency union based on fiscal self-discipline. Moreover, the EFSF now given more authority to intervene pre-emptively before a state gets bankrupt, didn't get more funds.

German backlash appears to be also growing. While the market appears to be moving beyond solvency to looking at potential threat to the eurozone as a whole, the elements needed to fight systemic failure are not present. At best, the deal reflected a courageous effort but fell short of addressing underlying issues, leading to fears that Greece-like crisis situations could still flare-up, spreading this time deep into the eurozone's core.

Growing pains

The excitement of the bailout blanked out an even bigger challenge that could further destabilise the eurozone sluggish growth. The July Markit Purchasing Managers Index came in at 50.8, the lowest since August 2009 and close enough to the 50 mark that divides expansion from contraction. And, way below the consensus forecast. Both manufacturing and services slackened. Germany and France expanded at the slowest pace in two years in the face of a eurozone that's displaying signs it is already contracting. Looking ahead, earlier expectations of a 2H'11 pick-up now remains doubtful.Lower GDP growth will require fiscal stimulus to fix, at a time of growing fiscal consolidation which threatens a downward spiral. At this time, the eurozone needs policies to restart growth, especially around the periphery. Without growth, economic reform and budget restraints only exacerbate political backlash and social tensions. This makes it near impossible to restore debt sustainability. Germany may have to delay its austerity programme without becoming a fiscal drag. This trade-off between growth and austerity is real.

IMF studies show that cutting a country's budget deficit by 3% points of GDP would reduce real output growth by two percentage points and raise the unemployment rate by one percentage point. History suggests growth and austerity just do not mix. In practical terms, it is harder for politicians to stimulate growth than cut debt.

Reform takes time to yield results. And, markets are fickle. In the event the market switches focus from high-debt to low-growth economies, a crisis can easily evolve to enter a new phase one that could help businesses invest and employ rather than a pre-mature swing of the fiscal axe. Timing is critical. It now appears timely for the United States and Europe to shift priorities. They can't just wait forever to rein in their debts. Sure, they need credible plans over the medium term for deficit reduction. More austerity now won't get growth going. The surest way to build confidence is to get recovery onto a sustainable path only growth can do that. Without it, the risk of a double-dip recession increases. Latest warnings from the financial markets in Europe and Wall Street send the same message: get your acts together and grow. This needs statesmanship. The status quo is just not good enough anymore.

Former banker Dr Lin is a Harvard educated economist and a British chartered scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.

A choice for Americans: Spend more Borrow more? Spend less Tax more?

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Debt crisis: America faces a decision that will affect us all

The financial crisis will force the Obama administration to make a choice that will define its future - and ours. 

Wall Street blues: America's problem is political, not economic Photo: ALAMY By Jeremy Warner

To understand the origins of today’s stand-off between Republicans and Democrats over the US debt crisis, it is necessary to revisit an event which took place in Boston Harbour nearly 238 years ago. On December 16, 1773, a group of Massachusetts colonists boarded ships belonging to the East India Company and threw the entire cargo into the sea. There, in tax rebellion, began the American Revolution.

This iconic event in US history, the one from which the modern Tea Party takes its name, helped establish a national aversion to taxation that has remained at the heart of the American psyche ever since. For a people defined by the idea of rugged individualism, self-reliance and the frontier spirit, the presumption of low taxes – and correspondingly small government – is an article of faith as sacred as motherhood and apple pie.

 The Problem

Few would contest the manifold economic success that these principles have delivered. They are the very foundation of the American economic model, and helped to make the US the richest and most powerful nation the world has ever seen. But here’s the problem. In recent times, both government and its spending commitments have been getting a whole lot bigger. Taxation, on the other hand, has failed to keep pace. On the contrary: under George W Bush, America reduced its tax burden even as its spending escalated. Since President Obama came to power, spending has run further out of control, with no compensating tax increases.

Hard as it is to believe in some of its states, America as a whole remains a low-tax economy in comparison with most other “rich” nations. Yet its government spending is approaching the heroic levels seen in Europe. For the time being, the gap is filled by borrowing from foreigners, a plainly unsustainable and humbling path – made all the more worrying by the fact that there are huge spending pressures still to come from the needs and demands of an ageing population. Something has to give. Either America must spend less, or tax more.



Misconceptions

But before analysing the significance of this choice, we need to lay a couple of misconceptions about the nature of the current crisis to rest. From President Obama to Larry Summers, the former treasury secretary, to Christine Lagarde, the managing director of the IMF, to our own Vince Cable, the airwaves have been ringing with apocalyptic warnings about the likely consequences for the world economy should Congress fail to break the impasse over the debt ceiling by the August 2 deadline. Any American default, Summers has warned, would be like “Lehman on steroids… it’s gonna be financial Armageddon”.

Lagarde has wagged her finger at the US and urged action similar in its “courageousness” to that taken last week by the eurozone, which she somewhat optimistically seems to think has now largely solved its problems. Meanwhile, the Business Secretary, in an extraordinary and ill-advised outburst, accused “a few Right-wing nutters” in Congress of posing a bigger threat to the world economy than the trials and tribulations of the euro.

To heap the blame for America’s indecision on a particular ideology is to misunderstand the nature and importance of the debate – yet Mr Cable seems determined to accuse President Obama’s opponents of holding the world to ransom.

Are any of these warnings valid? Well, if America were to default, it would indeed be a seismic upheaval of shattering dimensions. In reality, it’s not going to happen. What’s being played out here is not, at this stage at least, an existential event, but a political charade.

Distress signs

There have been signs of distress in financial markets in recent days, but in the main, investors have displayed a remarkable lack of concern, with US Treasuries still trading at yields close to their historic lows.

They are right to be sanguine. The bottom line is that Mr Obama is not about to go down as the first president in history to default – which in any case would be to breach the Constitutional amendment stating that “the validity of the public debt of the United States shall not be questioned”.

Much as he would like to blame Republicans for such a calamity, he would not be able to escape responsibility. It is the President’s job to find solutions. The buck ultimately stops with him.

If, by some outside chance, the President does petulantly decide to throw himself off the cliff, it will be an unnecessary and surreal type of default. America is not insolvent, in the same way that some of the peripheral economies of the eurozone plainly are. It’s simply that it cannot agree on the correct balance between spending and tax. The crisis is political, not economic – which makes it quite unlike the situation in the eurozone, where it is both.

The immediate problem of the deficit – and possibly of the longer-term demographic challenges, too – could easily be solved with a single measure, the imposition of a European-style federal sales tax, akin to VAT. Yet hell will freeze over before such an abomination is agreed.

With characteristic wit, Mr Summers has summarised the issue thus: Democrats are against VAT because they see it as a regressive tax which would hit the poor, while Republicans are against it because they see it as a money machine that would entrench high state spending. Perhaps if Democrats came to appreciate its qualities as a revenue generator, and Republicans its regressive characteristics, they might actually be able to agree.

The parties have produced several rival plans for fiscal consolidation, but there’s little merit in getting into the minutiae: to the outside world, they all look as flawed and implausible as each other.

And the detail of the argument is, in any case, almost irrelevant compared to the titanic battle for the heart and soul of America’s future that underlies it.

Staying loyal

Does the US economy stay loyal to its low-tax, libertarian traditions, or does it retreat into serene, low-growth, European-style old age by reinforcing its social welfare programmes and charging citizens the taxes necessary to pay for them? Not since the Civil War has the nation been so polarised. If it were possible to split the US in two, and for each half to go its own way, it might provide some kind of a solution. But, ultimately, one voice must triumph over another.

For the US to forsake the principles that have underpinned its economic success for more than two centuries would be a disaster not just for the country, but for the world. European experience teaches that rising taxes almost invariably entrench higher spending. Once a culture of entitlements – a cushy, cradle-to-grave welfare state – becomes established, it’s very difficult to remove. When a choice then has to be made between spending on welfare and productive investment in the nation’s future – education, defence and so on – the latter is always culled first.

European style

Paradoxically, although moving to a European-style tax base would provide all the revenues the country needs, it would inevitably mark the start of America’s long retreat from military and economic hegemony.

Economic might is as much to do with confidence and perception as reality. The spectacle of a nation so lacking in credible political leadership that it cannot resolve its differences, threatens to default on its debts, and would rather print money than face up to its underlying economic challenges, is already perilously close to breaking the spell. America needs to wake up, before it’s too late.

U.S. May Lose AAA Rating Even With a Debt Deal !

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U.S. May Lose AAA Rating Even With a Debt Deal, BlackRock, Templeton Say

By Wes Goodman

BlackRock Inc., Franklin Templeton Investments, Loomis Sayles & Co., Pacific Investment Management Co. and Western Asset Management said the U.S. faces losing its top-level debt rating as officials struggle to raise the $14.3 trillion borrowing limit and reduce spending.

Investors are warning a cut is likely as President Barack Obama and House Speaker John Boehner argue over how to increase the debt ceiling, while also trying to curb borrowing. The government needs to boost the cap by Aug. 2 so it can keep paying its bills, according to the Treasury Department.

The comments suggest that the world’s biggest bond managers are resigned to the fact that the U.S. rating will be cut. Standard & Poor’s, which has rated the U.S. AAA since 1941, said July 14 that the chance of a downgrade is 50 percent in the next three months and it may cut the nation as soon as August if there isn’t a “credible” plan to reduce the nation’s deficit.

“Addressing the debt ceiling is of course very important, but addressing it alone doesn’t avert a downgrade,” Barbara Novick, a co-founder and vice chairman at BlackRock, the world’s biggest money manager with $3.66 trillion in assets, said in an interview. “Without a credible plan to cut the deficit, that’s a real issue.”

Obama has said the nation’s record borrowings may “do serious damage” to the U.S. economy by diverting tax dollars to interest payments. Yields indicate investors are favoring bank or company debt over Treasuries, raising concern the credibility of government debt is waning.

‘Massive Consequences’

Moody’s Investors Service and Fitch Ratings have also said they may cut the nation’s top-level sovereign ranking if officials fail to resolve the stalemate.

“If the U.S. defaults, there would be massive consequences,” Pacific Investment Management Co.’s Mohamed El- Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “People are concerned, but they sort of think it’s a very, very low probability, and we would agree.”

The ratings may be reduced because politicians probably won’t agree on a plan to trim spending, said Kathleen Gaffney, co-manager of the $21 billion Loomis Sayles Bond Fund.


U.S. Credit Rating Downgrade Prospects
http://bloom.bg/pCfVUu

‘Certain’ Downgrade

“I’m pretty certain that at least by one agency we’re going to see a downgrade,” Gaffney, who is based in Boston, said yesterday in an interview on Bloomberg Television’s “Street Smart.” Treasuries will “continue to be a large, liquid market whether it’s AAA or AA,” she said.

Gaffney’s fund returned 14 percent in the past year, beating 98 percent of its competitors, according to data compiled by Bloomberg.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, narrowed to 18.7 basis points yesterday, the least since March.

Debentures from Wal-Mart Stores Inc. (WMT), the largest retailer, and Paris-based utility EDF SA (EDF), both rated in the second-highest AA level, are the best-performing investment-grade corporate securities globally this month through July 25, Bank of America Merrill Lynch indexes show.

An index of corporate debt with the same AAA rating that the U.S. is at risk of losing is outperforming Treasuries by 0.13 percent, the most since March.

Yield Rise

“The longer-term implications are that a downgrade could be bad for our currency and this could raise our borrowing Costs,” Stephen Walsh, the chief investment officer of Western Asset Management, the Pasadena, California-based fixed-income unit of Legg Mason Inc., said in an interview. Walsh oversees about $365 billion in bond assets.

The 10-year Treasury yield rose five basis points to 3 percent as of 1:17 p.m. in New York, according to Bloomberg Bond Trader prices. The budget stalemate hasn’t been enough to push the rate to its decade-long average of 4.05 percent.

“Our growing debt could cost us jobs and do serious damage to the economy,” Obama said in a speech July 25. “Interest rates could climb for everyone who borrows money: the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand.”

A House vote on Speaker Boehner’s two-step plan to raise the debt ceiling was postponed yesterday, casting doubt on whether lawmakers and Obama can come to an agreement before Aug. 2. Boehner has said Obama is seeking a “blank check.”

Investors may question the creditworthiness of the U.S., Christopher Molumphy, chief investment officer for Franklin Templeton’s fixed-income group, wrote in a report July 25 that his company distributed today by e-mail.

“Continued doubts about a longer-term solution to the U.S.’s federal deficit may well threaten the country’s AAA credit rating and the status of U.S. Treasuries as assets previously perceived as virtually ‘risk-free,’” according to Molumphy, who is based in San Mateo, California. He helps oversee $734.2 billion at the company.

US Home Price rise fails to lift housing gloom

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By Lucia Mutikani

WASHINGTON | Tue Jul 26, 2011 8:03pm EDT
 

(Reuters) - Prices for new single family homes rose to a five-month high in June even as sales slipped, but recovery for the broader housing market continues to be frustrated by an oversupply of properties.

The Commerce Department said on Tuesday the median sales price for a new home increased 5.8 percent last month to $235,200. Compared to June of last year, prices rose 7.2 percent.

Indications that home prices were starting to stabilize were also evident in the S&P/Case Shiller survey, whose composite index of prices in 20 metropolitan areas was flat in May after a 0.4 percent gain in April.
Analysts, however, said firming prices would likely be short-lived given the huge supply of homes on the market.

"Sales are the key and the surge turns into a torrent only if the sales firm or much more time passes," said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

New home sales fell 1 percent to an annual rate of 312,000 units in June. A report last week showed sales of previously-owned homes fell to a seven-month low in June, but average prices rose 0.8 percent to $184,300 from a year ago.

SPRING FLUKE?

"We have been expecting an increase in home prices in the spring as distressed sales become a smaller share of activity amid a seasonal pick-up in voluntary sales," said Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch in New York. "This will likely reverse in the winter, dragging down prices again."

A glut of homes for sale as the economy struggles with a 9.2 percent unemployment rate is weighing on the housing market. There were about 3.77 million used homes on the market in June, plus properties in foreclosure.

The housing market is just one trouble spot for an economy that has been trapped in a soft patch since the beginning of the year.

But there is also hope U.S. economic growth will regain momentum in the second half of the year, and other data on Tuesday showed consumers grew more optimistic about the future this month.

The Conference Board's index of consumer attitudes rose to 59.5 from 57.6 in June, beating economists' expectations for a reading of 56.0.

Still, confidence remains at low levels and consumers grew less optimistic about current conditions. 

Confidence could be shattered if the U.S. Congress fails to raise the country's borrowing limit, which could trigger a debt default and downgrade of the United States' coveted triple-A credit rating.

The stalemate in debt talks pushed down Wall Street stocks for a second straight day and drove the dollar downward against a basket of currencies. But prices for U.S. government debt rose as investors still regard Treasuries as one of the lowest-risk investments out there.



COMPANIES WORRIED

U.S. corporations are concerned about the recovery, which has struggled to gain momentum after the 2007-09 recession with the drag of high unemployment and slack demand.

United Parcel Service Inc, the world's largest package delivery company, gave a cautious outlook and cited the stalled debt talks as a threat to confidence.

Ford Motor Co, announcing profits that topped Wall Street expectations, said it now sees U.S. sales for the full year at the bottom end of its previous forecast of 13 million to 13.5 million vehicles.

The government is expected to report on Friday the economy grew at a 1.8 percent annual rate, according to a Reuters survey, after a tepid 1.9 percent pace in the first three months of the year.

A Reuters survey of economists put the prospect of a new recession at one in five, and 38 of the 54 economists polled said they expected the United States would lose its triple-A debt rating from at least one ratings agency.

(Additional reporting by Leah Schnurr in New York, Editing by Neil Stempleman, Gary Crosse)

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