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Consumers Vs. Businesses Square Off on Economy

AP

The dismal home sales numbers released Monday morning are the latest to illustrate a developing disconnect between consumer sentiment and behavior, on the one hand, and between business plans, on the other.

Sales of previously owned homes dropped 9.6 percent in February, to a 4.88 million annual rate. That’s far slower than Bloomberg’s median forecast of economists estimate of 5.13. The median price dropped 5.2 percent from a year earlier, according to figures from the National Association of Realtors.

This comes just a few days after we learned that February saw a year over year decline in housing starts of 20.8 percent, according to the Census Bureau. Building permits dropped 20.5 percent, year over year.

Inflation-adjusted consumer spending fell in January—the most recent month for which we have data—surprising many economists who thought we’d see a bigger economic stimulus from the Obama administration’s payroll tax cut. As it turns out—and as we predicted—Americans are saving a much higher portion of the tax than expected.

Meanwhile, consumers are also losing confidence. The preliminary March reading of the University of Michigan's consumer sentiment index for March came in at 68.2, well off Reuters’ median forecast of economists of 76.5.

In short, all the economic indicators on the consumer sign are pointing toward a sluggish economy. All nine recessions since 1959 have seen a year over year decline in building permits. In eight of the last nine the annual rate of change hit negative 20 percent or lower, and the economy went into a recession. The consumer spending and sentiment numbers, while not as accurate predictors of recession, rarely drop lower than 70 outside of a recession.

On the other hand, businesses seem to be anticipating a robust recovery. Banks forecast big gains to the economy from the Obama tax cut. Production at U.S. factories increased for a sixth straight month in February. Jobs in the U.S. service sector expanded in February at the fastest pace in more than five years.

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