New economic data suggests recession is easing

Tuesday, May 5, 2009

WASHINGTON -- Evidence that housing is poised to improve and optimism about the results of banking "stress tests" raised hopes Monday that the recession is easing and helped lift a stock market measure into the black for the year.

Construction spending and pending home sales both fared better than expected in March, and private economists saw the reports as evidence the overall economy is stabilizing after its bleakest stretch in a half-century. If so, the economy might be able to mount a recovery in the second half of 2009.

Wall Street took the same view. All the major stock indexes jumped more than 2 percent. The Standard & Poor's 500 rose 3.39 percent, showing a gain for 2009.

"Investors believe the worst of the downturn is behind us," said Mark Zandi, chief economist at Moody's "The economy is still in a recession. But the rate of decline is moderating, and a bottom for the housing market and the overall economy are coming into view."

Also helping were rising expectations that the government-run stress tests, showing how the nation's 19 largest banks would fare in a severe recession, have found most of them in reasonably good shape. The test results are expected to be released Thursday after markets close.

Federal Reserve chairman Ben Bernanke has said none of the 19 banks will be allowed to fail and that any institution that needs to raise more capital will be given six months to do so.

If the bank cannot raise the needed capital as a cushion against future loan losses, the government will supply the needed resources, Bernanke has said.

The Fed chairman is scheduled to testify to Congress today about the state of the economy.

The Commerce Department reported that construction spending rose 0.3 percent in March. It was the first increase after five straight months of declines. And it was far better than the 1.5 percent drop analysts had expected.

Meanwhile, the National Association of Realtors said its index of pending home sales rose 3.2 percent to 84.6 in March. That was the second monthly increase after the index hit a record low in January. The pending sales index is now 1.1 percent above last year's levels.

Typically, there's a one- to two-month lag between a contract being signed and a final deal being sealed. So the index is a good barometer for future home sales.

Economists saw both reports as good news.

"Things certainly look a bit less bad than in the dark days at the turn of the year," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note.

Some analysts cautioned that the economy still faces threats from waves of layoffs and rising mortgage defaults, which are causing more banks to tighten lending standards.

The Fed reported Monday that about 50 percent of U.S. banks had tightened their lending standards on prime mortgages and that 65 percent had tightened standards on nontraditional mortgages. Both percentages were higher than in the last survey in early February.

Many builders also are finding it harder to get lending for their projects because of rising defaults on commercial real estate.

Because of such problems, the overall economy, as measured by the gross domestic product, is expected to keep shrinking in the current quarter.

But Zandi said he expects a GDP decline in the current quarter of just 2.4 percent before GDP turns slightly positive in the second half of this year. That would be far milder than the 6.1 percent decline for the first three months of this year and the 6.3 percent drop in the final three months of last year -- the worst six-month contraction in overall economic output in a half-century.

The initial stress test results showed that Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. would need to raise more capital, sources have told The Associated Press, though the banks are disputing those findings. Investors also have grown concerned about regional banks that carry risky loans on their books in such areas as mortgages, credit cards and commercial real estate.

The government will brief banks Tuesday on its final decisions about their appeals.

The construction report showed that spending on private residential projects fell 4.2 percent in March. It was the latest in a series of declines that began three years ago, when the housing bubble burst with disastrous effects for the home industry and the overall economy.

Nonresidential construction rose 2.7 percent in March, the biggest advance in nine months and the second straight increase. It was led by gains in office construction, hotels and power plants.

Government building activity also showed strength in March, rising 1.1 percent. A 1.3 percent gain in state and local activity offset a 1.7 percent drop in spending on federal projects.

The rise in state and local activity was viewed as an early sign of the impact of the $787 billion economic stimulus bill Congress passed in February to try to get money to the states for building projects.

Some analysts fear that the commercial real estate market could topple into the worst crisis since the last great property bust of the early 1990s. Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or close.

Economists are more hopeful, though, that the three-year slide in housing could be nearing a bottom, although they do not expect prices to stop falling until early next year.

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