Sunday, October 28, 2007

Housing Slump May Reduce Payrolls, Growth: U.S. Economy Preview

By Joe Richter

Oct. 28 (Bloomberg) -- Smaller employment gains and slower growth signal the two-year U.S. housing slump is reverberating through the economy, economists said before reports this week.

Employers added 80,000 workers to payrolls this month following an increase of 110,000 in September, based on the median forecast in a Bloomberg News survey of economists before a Nov. 2 government report. Figures two days earlier may show the economy expanded at a slower pace in the third quarter.

Manufacturers fired workers for a 16th consecutive month in October, while declines in subprime-mortgage lending and homebuilding led to job losses at construction companies and financial institutions. Federal Reserve policy makers will lower the target interest rate again this week to sustain the expansion through the real-estate crash, economists said.

``Evidence on the labor market is that things are on the soft side,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``The Fed is likely to cut rates as insurance.''

The Labor Department's employment report may also show the unemployment rate held at 4.7 percent for a second month, based on the survey median.

Factory payrolls probably shrank by 15,000 workers this month, the survey showed, capping an almost 200,000 decline in employment at manufacturers since the same month last year. Economists at Lehman Brothers Holdings Inc. in New York are among those also forecasting declines at homebuilders and financial firms.

Mortgage Firings

Countrywide Financial Corp., the biggest U.S. mortgage lender, is in the process of cutting 10,000 to 12,000 jobs because of the drop in loans. The Calabasas, California-based company last week reported its first quarterly loss in 25 years and said profit would rebound in coming quarters.

Lennar Corp. Chief Executive Officer Stuart Miller said in a Sept. 25 statement that the company has cut 35 percent of its workforce and will continue to eliminate jobs to ``bring us back to profitability.'' Miami-based Lennar is the largest U.S. homebuilder.

Gains in wages and hours worked at service industries, such as health care and education, are giving the majority of employed Americans the means to keep spending, helping to prevent the economy from succumbing to the housing slump, economists said.

Earnings per hour rose 0.3 percent on average in October after a 0.4 percent gain the month before, the survey showed.

A Commerce Department report on Oct. 31 may show the economy cooled in the third quarter as a result of the decline in residential construction, while consumer spending quickened.

GDP Cools

Gross domestic product rose at an annual rate of 3.1 percent from July through September, compared with a 3.8 percent growth rate the prior quarter, according to economists surveyed. Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 3.2 percent pace, more than double the second quarter's growth rate.

A Commerce Department report Nov. 1 may show consumer spending grew in September. Purchases increased 0.4 percent after a 0.6 percent gain the prior month, based on the median forecast. Incomes rose 0.4 percent after a 0.3 percent August increase, the survey showed.

Still, the meltdown in subprime lending and turmoil in credit markets raises the risk the real-estate slump will worsen and spread to consumer spending. After meeting for two days, Fed policy makers will probably lower the benchmark interest rate on Oct. 31 to 4.50 percent from 4.75, the second cut in as many months, economists said.

Bigger Slowdown

Growth is expected to slow to a 1.8 percent pace this quarter as spending cools, based on a Bloomberg survey of economists this month.

There are signs the housing slump is starting to spill over to other industries.

A report from the Institute for Supply Management on Nov. 1 may show manufacturing grew in October at the slowest pace in seven months. The ISM's factory index probably fell to 51.5 this month from 52 in September. A reading greater than 50 signals expansion in manufacturing, which accounts for about 12 percent of gross domestic product.

Midland, Michigan-based Dow Chemical Co., the largest U.S. chemical maker, said third-quarter earnings dropped as the decline in housing reduced demand for latex and pipe-making materials. Slumps in the U.S. automotive and housing markets are hurting sales of wire, coatings and solvents, Dow Chief Executive Andrew Liveris said Oct. 25.

The economic slowdown will gradually push unemployment higher as businesses trim costs, economists said. The jobless rate will probably rise to 5 percent by the second half on next year, based on the Bloomberg survey earlier this month.

``The economy will still be creating jobs, but not enough to keep the unemployment from rising,'' Global Insight's Gault said.

Bloomberg Survey

Date Time Period Indicator BN Survey Prior
10/30 10:00 Oct. Confidence-Conf. Board 99.0 99.8
10/31 8:30 3Q Employment Cost Index 0.9% 0.9%
10/31 8:30 3Q A GDP Price Index 2.0% 2.6%
10/31 8:30 3Q A Gross Domestic Product 3.1% 3.8%
10/31 10:00 Oct. Chicago Purchasers 53.0 54.2
10/31 10:00 Sept. Construction Spending -0.5% 0.2%
11/01 8:30 10/13 Continuing Claims 2532.5K 2530K
11/01 8:30 10/20 Initial Jobless Claims 330K 331K
11/01 8:30 Sept. Personal Income 0.4% 0.3%
11/01 8:30 Sept. Personal Spending 0.4% 0.6%
11/01 10:00 Oct. ISM Manufacturing 51.5 52.0
11/01 10:00 Oct. ISM Prices 63.0 59.0
11/02 8:30 Oct. Avg. Hourly Earnings 0.3% 0.4%
11/02 8:30 Oct. Change Nonfarm Jobs 80K 110K
11/02 8:30 Oct. Unemployment Rate 4.7% 4.7%
11/02 10:00 Sept. Factory Orders -0.5% -3.3%
To contact the reporter on this story: Joe Richter in Washington .

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