U.S. Economy on Sounder Footing for 2002

NEW YORK – After a year marred by war and recession, evidence mounted Friday that the U.S. economy is poised to rebound in 2002 as U.S. consumer confidence posted its biggest rise in nearly four years, home sales surged and the pace of job losses stabilized.

The Conference Board's closely-watched consumer confidence index rose for the first time in six months in December, surging to 93.7, and November's reading was revised up to 84.9 from a seven-year low of 82.2.

After waves of job losses pounded consumer confidence for months, economists said Americans' spirits were lifted by a fourth quarter stock market rally, falling energy prices, progress in the war in Afghanistan and signs the labor market has weathered the worst of the slump.

"People are pretty optimistic about recovery, and when people are optimistic about a recovery, a recovery is more likely," said Bill Dudley, chief economist at Goldman, Sachs & Co.

Economists closely track consumer confidence as a gauge of future spending, which drives two-thirds of U.S. economic activity. The December surge should come as a relief to U.S. retailers, who, with the exception of large discounters, have suffered through a sluggish holiday sales season.

A separate report showed the U.S. residential real estate sector continued to defy recession in November as homebuyers snapped up new houses at the fastest pace since March.

The Commerce Department said new homes sales rose 6.4 percent in November to a seasonally adjusted 934,000 annual rate, far stronger than an 888,000 annual rate forecast by economists.

The National Association of Realtors said sales of existing homes rose 0.6 percent to a 5.21 million annual rate in November.

Unseasonably warm weather helped keep housing activity brisk in November, but the entire sector has been remarkably robust as the Federal Reserve's aggressive interest rate cuts this year have kept mortgage rates low.

JOBS MARKET WEAK BUT MAY BE STABILIZING

A Labor Department report showed that the job market remains weak but that conditions may be stabilizing.

The number of Americans lining up to file for first-time unemployment benefits climbed by 7,000 to 392,000 during the week ended Dec. 22 after falling for three straight weeks.

But the rise was not as bleak as the 401,000 claims forecast by economists, and the four-week moving average, which smooths out weekly volatility, fell for a third week in a row to 413,250 from 438,500 in the Dec. 15 week.

That marks a steady improvement from the shock of the Sept. 11 attacks, when weekly claims rose above 500,000 a week in October.

"Labor market conditions seem to be not necessarily improving, but the rate of decay seems to be slowing," said Steve Ricchiuto, chief economist at ABN Amro in New York.

Economists say that the jobless rate should keep on rising through much of 2002 even once the economy returns to growth.

Goldman's Dudley said the unemployment rate would likely top 6.5 percent next year, compared with a current six-year high of 5.7 percent.

"We are going to have a recovery no later than the spring, and possibly sooner," Dudley said. "But we think the recovery won't be as strong as some people think, so the jobless rate will gradually drift up."

BRIGHTER MANUFACTURING OUTLOOK?

The Commerce Department reported that orders for big-ticket manufactured goods fell in November, but gave back only part of October's huge defense-related gain, while demand for goods outside of the aircraft sector remained robust.

Orders for durable goods intended to last at least three years fell 4.8 percent to $175.58 billion after a whopping 12.5 percent increase in orders in October.

Orders for non-defense and non-transportation items both rose for a second straight month, which may bode well for the manufacturing sector, which has borne the brunt of the 2001 recession.

A Midwest region manufacturing survey, the Chicago Purchasing Managers index, inched up to 41.4 in December from 41.1 in November, but the data still showed the sector contracted for a 15th straight month.

One hopeful sign in the durable goods and Chicago manufacturing report, said ABN Amro's Ricchiuto, is that months of brutal inventory cutting has factories primed to fill new orders with new production, rather than by clearing shelves.

The raft of data gave blue-chip U.S. stocks, which have jumped more than 20 percent from three-year lows in September, a further boost.

The dollar bounced higher against the yen, and U.S. Treasury prices fell, pushing their yields higher, as bond investors bet an economic recovery may bring the Federal Reserve's aggressive interest rate cutting cycle to an end.

"The numbers on balance today are suggesting the economy is deteriorating at a slower rate than we've seen of late and that could well be laying the foundations for a first quarter recovery," said John Ryding, senior economist at Bear Stearns.