Ups & Downs In The Us Economy: A Mixed Bag For The Us Economy

The economic news for the US in November 2009 was a mixed bag of good and not-so-good news

. While new factory orders surged, pending home sales homes fell sharply. This is truly a mixed bag as a surge in new factory orders suggests that industry expects consumer demand to pick up and on the other hand a more than expected drop in sale of pre-owned homes suggests a sluggish consumer sentiment. Based on these two eventualities, one could question, if the industry's reading of better consumer demand is justifiable. What came as a surprise was a sharp drop in the National Association of Realtors' Pending Home Sales Index, which dropped 16% in November from its level of 96 in October after rising for nine consecutive months. However, the index was higher by 15.5% from a year ago level and the sudden drop could be linked to an expiration of tax credits.

The sudden drop in pending home sales in the US seems to point to the fact that the US housing market was propped on the government crutch of tax credits. The next few months will be important to watch how the housing market picks up. Taking a cue from the worsening of the pre-owned home sales position, the government has extended the $8, tax credit for first-time home buyers, which was scheduled to expire at the end of November to mid 2010. A Commerce Department report suggested that new orders at US factories expanded 1.1 % in November, this being the third consecutive monthly increase. Supporting industrial recovery were robust December auto sales. Other reports suggested that orders for non- defense capital goods, excluding aircraft rose 3.6% after having dropped 2.1% in the previous month.

Industrial growth seems to be setting into motion a positive cycle and job losses appear to be getting under control. The reported 11000 jobs lost in November were the lowest in any month since the onset of the recession in December 2007. Companies like Caterpillar have announced that they will start rehiring some of the people that have been laid off as business prospects start to improve. A careful analysis of these developments suggests that the US economy is displaying signs of a turnaround as industrial activity, which will help increase employment, has begun to pick up. The slowdown in home sales is more linked to the expiration of credits, which in any case have been extended.

Thus, gradually a virtuous cycle of growing industrial production, leading to job creation and increase in incomes, which further boosts demand, which in turn enhances factory orders, has been put into place. The news of a sharp decline in pending home sales is likely to lead investors to shed risky securities to some extent mostly for the purpose of booking profits. This could result in a temporary fall in stock markets and a spike in risk aversion currencies like the dollar and the Yen. However, the improving business environment seems to be becoming self sustaining, though some governmental support is still needed as in the case of tax credits related to home sales.

Sustainable positive growth in the economy should layout the firm ground for giving inherent strength to the dollar. Some firming of the dollar based on improved economic conditions has already taken place and further economic growth should see more firmness being imparted to the currency.

by: Pete Migz

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