WASHINGTON – Sour reports Thursday on the number of people who sought unemployment benefits and buyers of new homes illustrate what Federal Reserve Chairman Ben Bernanke acknowledged Wednesday: Many factors weighing on the economy are proving to be more chronic than first imagined.
The poor housing and employment data contributed to a bleak day of economic news. The European Central Bank chief renewed warnings about Europe's debt crisis and stocks tumbled. And 28 countries agreed to boost global oil supplies. Ultimately, that will provide some relief to consumers who have been paying higher gas prices since January. But it also forced energy stocks lower, contributing to the sell-off on Wall Street.
The Dow Jones industrial average fell 180 points in mid-day trading.
"We have had a worrisome string of soft numbers which is painting a fairly bleak picture of the recovery," said Sal Guatieri, senior economist at BMO Capital Markets. "The labor market is weakening according to the jobless claims numbers, confidence appears to be slipping among households and small businesses and home sales are still very depressed."
Applications for unemployment benefits rose last week by the most in a month, a sign that layoffs remain elevated. Applications jumped by 9,000 to a seasonally adjusted 429,000 last week, the Labor Department said Thursday. It was the second increase in three weeks and the 11th straight week that applications have been above 400,000.
New-home sales fell in May to a seasonally adjusted annual rate of 319,000, the Commerce Department said. That's far below the 700,000 homes per year that economists say must be sold to sustain a healthy housing market.
Housing remains the weakest part of the U.S. economy, analysts say. Sales of new homes have fallen 18 percent in the two years since the recession ended. Last year was the worst for new-home sales on records dating back half a century.
Analysts said that the reports served to highlight the Fed's decision this week to cut its economic outlook for growth and employment this year. It also supports worries expressed by Bernanke that many of the economy's troubles could last into next year.
Applications fell as low as 375,000 in February, a level that signals sustainable job growth. But applications surged in April to an eight-month high of 478,000 and have shown only modest improvement since that time.
The four-week average for unemployment benefit applications, a less volatile measure, was unchanged last week at 426,250.
The economy needs to generate at least 125,000 jobs per month just to keep up with population growth. And at least twice that many jobs are needed to bring down the unemployment rate, which rose to 9.1 percent in May.
Companies pulled back on hiring in the spring in the face of higher gas and food prices. That has cut into consumer spending on other discretionary items, such as furniture and appliances, which help boost economic growth. Employers added only 54,000 net new jobs in May, much slower than the average gain of 220,000 per month in the previous three months.
"We need initial claims to fall back below 400,000 to signal stronger economic growth than the area we seem to be mired in," said analysts John Ryding and Conrad DeQuadros at RDQ.
Though new homes represent only about 20 percent of the overall home market, they have an outsize impact on the economy. Each new home creates an average of three jobs and $90,000 in taxes, according to the National Association of Home Builders.
Larger down payment requirements, tougher lending standards and high unemployment are preventing people from buying homes. Many people who can afford to buy are holding off, worried that prices have yet to bottom out.
Fed officials said in a statement that they think the main causes of the economy's slowdown, such as high gas prices and supply disruptions from Japan's disasters, are temporary. Once those problems subside, Fed officials said the economy should rebound.
But at a news conference after the statement was released, Federal Reserve Chairman Ben Bernanke acknowledged that some of the problems slowing the economy could persist into next year. He cited continued weakness in the financial sector and persistent problems in the housing market.
As a result, the Fed reduced its forecast for employment and growth this year. It projects that unemployment at the end of 2011 will be around 8.6 percent to 8.9 percent. That's more pessimistic than its forecast from two months ago, which had put the unemployment rate at 8.4 percent to 8.7 percent by year's end.
That pessimism is also seen in projections by private economists. According to an Associated Press Economy survey last week, the nation will add only about 1.9 million jobs this year and the unemployment rate will fall to only 8.7 percent at the end of the year.
More hiring is critical to boosting the economic growth. It leads to greater consumer spending, which accounts for 70 percent of total economic activity. Consumer spending slowed to a 2.2 percent growth rate in the first three months of this year. The weakness reflected the rise in gas prices.
The Fed on Wednesday left a key interest rate unchanged at near zero percent and repeated a pledge to keep rates exceptionally low for "an extended period."