July new home sales sag as durables orders soft

Workers put together the frame of a home under construction in Lancaster, California March 22, 2010.

WASHINGTON (Reuters) - New home sales slumped to the slowest pace on record in July and orders for costly durable goods were weak, heightening fears the economy was at risk of another downturn.

The reports on Wednesday from the Commerce Department suggested growth could slow materially without government support and some economists saw the risk of a contraction in output in the third quarter.

"If you don't get a pick-up in the next couple of months, it sure looks like it's possible the economy could contract in the third quarter," said Keith Hembre, chief economist at First American Funds in Minneapolis, Minnesota.

The unrelenting flood of negative economic data is also bad news for the Obama administration, only months ahead of congressional elections in November, when Democrats risk losing a substantial number of seats due to voters' fears over the economy and anger over high unemployment.

So far, most economists are not predicting a double-dip recession, though they caution that weak growth will persist into next year.

Deutsche Bank cut its outlook for third-quarter growth after the data on durable goods, which it called "exceptionally weak," in a research note. The bank said it now sees real growth in gross domestic product to 2.0 percent in the third quarter, down from a prior forecast of 3.0 percent.

In a sign of the White House's level of worry, a vacationing President Barack Obama held a conference call with top advisers, including Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers, about the recent soft data.

"The economic team provided an update on the next steps to keep the economy growing, including assistance to small businesses and the extension of tax cuts to the middle class," the White House said in a statement. Obama is vacationing on the Massachusetts island of Martha's Vineyard.

Single-family home sales plummeted 12.4 percent last month to a 276,000-unit annual rate, the lowest since the series started in 1963, the Commerce Department said. June's sales pace was revised down to 315,000 units. Markets had expected a 330,000 unit rate in July.

In a separate report, the department said new orders for long-lasting manufactured goods excluding transportation equipment posted their largest decline in 1-1/2 years in July while overall bookings rose far less than expected.

Stocks on Wall Street initially fell on the bearish data but rebounded to end slightly higher and snap a four-day losing streak as bargain-hunters inched back into the market. U.S. government debt prices fell, but an earlier rally narrowed the yield curve -- reflecting the difference between long - and short-term interest rates -- to its flattest in 16 months.

Meanwhile, mounting speculation in the foreign exchange markets of intervention by Japanese authorities helped to pull the dollar off a 15-year low against the yen.

FADING GOVERNMENT STIMULUS

The economic recovery from the longest and deepest recession since the Great Depression is losing steam after brisk fourth and first quarters fueled by government stimulus and sturdy business investment.

Much of the stimulus has already been spent and there is little political appetite to inject more government money to support the faltering recovery amid a swelling budget deficit.

Some analysts see the possibility that Democrats will lose control of the U.S. House of Representatives, which would complicate administration efforts to press ahead with reforms to fight climate change and other initiatives.

A Reuters/Ipsos poll on Tuesday showed Obama's approval rating at 45 percent, overtaken for the first time by a 52 percent disapproval rating.

The housing market, the key trigger of the recession, has suffered the most from the end of government support. The April expiry of a popular tax credit for home buyers has depressed sales and building activity.

"What we are seeing is the downside of government intervention. It had fanned expectations of a market bottom when in fact, it created a false bottom," said Tom Porcelli, a senior economist at RBC Capital Markets in New York.

Data on Tuesday showed sales of previously owned homes dropped in July to their slowest pace in 15 years. The weak pace resulted in the supply of new homes available for sale spiking to 9.1 months' worth from 8.0 months' worth in June.

The median sale price for a new home fell last month from June to its lowest since December 2003. A price gauge for new and existing single-family homes fell for the first time in four months in June, a government agency said.

HIGH UNEMPLOYMENT

An unemployment rate of 9.5 percent is also depressing housing activity. Mortgage purchase applications rose only 0.6 percent last week, even as 30-year loan rates fell to 4.55 percent, the Mortgage Bankers Association said in a report.

Although luxury home-builder Toll Brothers Inc (TOL.N) reported its first quarterly profit in three years, it said orders fell 16 percent.

In the durable orders report, overall bookings rose 0.3 percent, far less than the 2.8 percent increase markets had expected. Last month's moderate increase was the latest indication the sector that has been the main driver of the recovery is losing momentum.

Even more concerning, non-defense capital goods orders excluding aircraft -- a closely watched proxy for business spending -- slid 8 percent last month after a 3.6 percent increase in June.

"The strength of second-quarter GDP was business spending. It looks like businesses are pulling back from this commitment in a very big way in July. It's an indication of how sentiment is deteriorating," said Christopher Low, chief economist at FTN Financial in New York.

Durable goods inventories rose for a seventh straight month and shipments, which figure in the calculation of gross domestic product, rose 2.2 percent last month after June's 0.2 percent gain. Unfilled orders slipped 0.1 percent after rising for three straight months.

(Editing by Dan Grebler and Leslie Adler)