Purchase orders, home buying in slump
Staff and Wire Reports
Posted: 08/25/2010 07:46:33 PM PDT

The economic recovery appears to be stalling as companies cut back last month on their investments in equipment and machines and Americans bought new homes at the weakest pace in decades.

The local economy displayed little growth as employment declined and new orders remained flat in July, according to an Inland Empire report on business prepared by the Institute of Applied Research at Cal State San Bernardino.

“If I can’t be confident with market expanding, why would I make capital investment to increase my production?” said Terry Herrmann, director of material at the Rancho Cucamonga-based PneuDraulics Inc., a manufacturer of precision hydraulic components for the aerospace industry.

“That would be ludicrous.”

The institute report said the percentage of local purchasing managers expecting a weaker economy in the months ahead is 37, up sharply from 29percent in June.

The local Purchasing Managers Index, a survey that measures production and inventory, did rise marginally from 50.2 in June to 51.9 for July, the institute reported. A reading of 50 or higher generally indicates industry is expanding.

Half of those surveyed said they expect the economy to stay the same, down 11 percentage points from June. The number of purchasing managers who expect the economy to get stronger went up from 10 percent to 13 percent.

Nationally, overall orders for big-ticket manufactured goods increased 0.3 percent in July, the Commerce Department said Wednesday. But that was only because of a 76 percent jump in demand for commercial aircraft.

Taking out the volatile transportation category, orders for durable goods fell at the steepest rate since January. And business orders for capital goods took their sharpest drop since January 2009, when the economy was stuck in the deepest recession in decades.

The Commerce Department said new home sales fell 12.4 percent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600, the slowest pace on record dating back to 1963.

Statewide, new home sales in June were off 36 percent from a year ago, according to the California Building Industry Association. Inland Empire new home sales were down 37.6 percent.

“Who is it that we expect will buy these homes?” asked Herrmann. “Unemployment is not going down. When someone loses their job their first thing to do is not to go out and buy a new home the next day.”

Some of the new housing slowdown can be attributed to the federal housing stimulus program that ended in May, he said. It gave a tax credit of up to $6,500 for existing home owners who purchased a principal residence before April 30, 2010.

“It’s kind of like “Cash for Clunkers,” Herrmann said. “People who were thinking of buying a new car before the end of the year said `I might as well get it now.”‘

The weak sales mean fewer jobs in the construction industry, which normally powers economic recoveries. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Locally, the employment index, one of the figures measured on the scale form 0 to 100, decreased from 51.5 in June to 47 in July, according to the Institute of Applied Research. The local production index rose from 51.5 to 57.6, but so did the inventory index – up from 41.2 to 47.

The poor economic news is likely to stoke fears the economy is on the verge of slipping back into a recession.

“The rebound in manufacturing was one of the bright spots in an otherwise disappointing recovery,” said Paul Ashworth, senior U.S. economist at Capital Economics. “Take it away, throw in a relapse in housing, and you don’t have much left.”

Factory orders are a key measure of the economic recovery. Manufacturers have helped to lead the rebound. They filled orders for businesses that were building up stocks after whittling them down during the recession.

But many companies are done restocking, cooling demand for factory goods.

Demand for durable goods has mostly risen in recent months. Orders are 15.6 percent higher than they were a year ago. Excluding transportation, demand increased in all but two months this year.

Overall orders in June declined by a revised 1.0 percent. But excluding transportation, orders rose 0.2 percent. Spending by businesses increased 3.6 percent that month – a rare bright spot.

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