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Why US economy is flashing conflicting signals

WASHINGTON--Anyone puzzled by the most recent U.S. economic data has reason for feeling so: The numbers sketch a sometimes contradictory picture of the economy.

We've learned that:

Consumers are more confident but aren't spending much. Fewer people are losing jobs, but not many are being hired. Home and stock prices are up, but workers' pay is trailing inflation. Auto sales have jumped, but manufacturing is faltering.

This is what an economy stuck in a slow-growth rut can look like, and it's a focal point of the presidential campaign. The U.S. economy grew at a scant 1.3 percent annual rate in the April-June quarter — too weak to reduce high unemployment. And most economists foresee little if any improvement for the rest of the year.

Many Americans are reducing debt loads instead of spending freely. Builders are borrowing less and constructing homes at a modest pace. Businesses are being cautious about hiring and expanding.

In the long run, reduced debts and rising home and stock prices will help rebuild household wealth, boost consumer spending and spur job growth. But it's taking time.

“The U.S. outlook could best be described as one of near-term weakness and long-term strength,” says Chris Jones, an economist at TD Bank.

Here are some of the mixed signals recent economic reports have sent with the election now five weeks away:

Housing

After plunging when the housing bubble burst, home prices are finally rising steadily, according to the Standard & Poor's/Case-Shiller index. The index rose in July compared with a year earlier. That was the second straight year-over-year gain. Still, the annual pace of new-home sales dipped in August from a two-year high in July. At the same time, sales were nearly 28 percent above the level a year earlier.

The Good News: For most Americans, a home is their most valuable asset. As its value increases, homeowners grow wealthier and typically feel more confident. That tends to spark more consumer spending — the U.S. economy's main fuel. Rising prices also lead more people to sell homes, further energizing the housing market. More sales would likely spur further homebuilding.

The Bad News: Home construction now plays too small a role in the economy to provide much lift. It made up only 2.4 percent of the economy in the April-June quarter. That compares with a peak of 6.3 percent at the end of 2005 and a longer-run average of just under 5 percent. “Housing would therefore need to be on steroids to provide a major boost to growth,” Paul Dales, an economist at Capital Economics, said in a note to clients.

Looking Ahead: Record-low mortgage rates are likely to keep homes affordable. The Federal Reserve's decision to spend US$40 billion on mortgage bonds each month until the recovery accelerates should keep rates low and increase home sales. Rising builder confidence also suggests that construction will keep growing. But many Americans lack the credit to qualify for a mortgage. Or they can't afford the larger down payments now required.

Consumer Confidence

Americans are feeling better about the economy despite chronically weak job gains and pay levels that lag inflation. The private Conference Board's index of consumer confidence is at a seven-month peak. A survey of consumer sentiment by the University of Michigan has reached its second-highest point in nearly five years. Both surveys found that consumers are lukewarm about current economic conditions but more optimistic about the future.

The Good News: When consumers are confident, they're generally more likely to spend. Both surveys also found that consumers expect hiring to pick up.

The Bad News: You can't spend confidence. Rising confidence doesn't always lead to higher spending. And when an economy is healthy, consumer confidence is usually much higher than it is now.

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In this Thursday, Sept. 1, 2011 file photo, a worker sits atop a steel beam at the Love Field modernization project construction site in Dallas. Anyone puzzled by the most recent U.S. economic data has reason for feeling so as the numbers sketch a sometimes contradictory picture of the economy. People are more confident but are not spending much. Fewer people are losing jobs. (AP)

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