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.
Applications for unemployment benefits rose to a seasonally adjusted 429,000 last week, the Labor Department said Thursday. It was the biggest jump in a month and marked the 11th straight week that applications have been above 400,000. Elevated unemployment benefit claims signal a worsening job market.
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. 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.
Stocks fell after the weaker data on housing and layoffs were released. It came one day after the Fed lowered its outlook for growth and unemployment for the rest of the year. The Dow Jones industrial average dropped 92 points in late-afternoon trading.
A renewed warning from the European Central Bank chief about Europe's debt crisis contributed to the day's bleak economic news. And an agreement by 28 countries to boost global oil supplies forced energy stocks lower, contributing to the sell-off on Wall Street.
"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."
The Fed cut its economic growth forecast to between 2.7 percent and 2.9 percent this year, down from its range of 3.1 percent to 3.3 percent in April. The Fed also raised its unemployment rate estimate slightly, saying it would not fall below 8.6 percent this year.
Economists say they are worried by potential conflicting explanations for the more downbeat view.
In its policy statement, the Fed blamed the worsening outlook in part on temporary factors. High gas prices have forced consumers to spend less on discretionary items, such as appliances and vacations, which help boost growth. And supply disruptions from Japan's natural disasters have slowed manufacturing growth. The Fed said those problems should abate by the fall, and growth would pick up.
But when pressed by reporters, Bernanke acknowledged that some of the troubles are stronger and more persistent. He singled out the weaknesses in the financial sector and the housing market. And he said those problems could linger for some time.
"The chairman talked about temporary factors, but housing is clearly not temporary. It's a structural problem. This is going to stay with us for a while," said Yelena Shulyatyeva, an analyst at BNP Paribas.
The White House is trying to avoid further unexpected setbacks to the economy. The Obama administration announced Thursday it was releasing 30 million barrels of oil from the country's emergency reserve, the largest ever. It is intended to increase U.S. supplies during the busy summer driving season and will likely send the cost of gas, which has already been falling, down further.
The other 27 nations said they would release a combined 30 million gallons. Together, that would add an extra 60 million gallons of oil to the world's supply. Still, American motorists use about that much in just three days.
What would help the economy most are jobs, analysts say. But 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.
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.
Unemployment 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.
"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.
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.
Home sales and construction would normally contribute up to 1.5 percent to the U.S. economy during post-recession recoveries. In the two years since the Great Recession officially ended, plunging prices and dismal sales have subtracted an average of 0.4 percent per year from the gross domestic product.
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.
Despite historically low mortgage rates, which stayed steady Thursday at 4.50 percent on 30-year fixed home loans, fewer people can qualify or even want to buy a home right now. That will continue to drag on the broader recovery for years to come.
"We're starting off at a lower takeoff point because of housing," said Michael Gapen, senior U.S. economist at Barclays. "So we're going to be more vulnerable to shocks." Some recent temporary shocks: automotive supply-chain disruptions caused by the Japanese natural disasters, lingering fears over Greek's sovereign-debt crisis and tornadoes and flooding across the U.S. South and Midwest.