WASHINGTON Contracts to buy previously owned homes fell in March and businesses, faced with a slump in demand, slashed worker hours in the first quarter to increase productivity and safeguard profits, data on Wednesday showed.
The National Association of Realtors Pending Home Sales Index, based on contracts signed in March, fell 1 percent to 83.0, the lowest since this index began in 2001, and was 20.1 percent lower than a year ago.
Economists were expecting a decline in these contracts, which are a good barometer of future home sales, as homeowners have been increasingly skittish about buying homes in a market where prices are declining and as mortgage financing is more difficult to obtain.
"This is not a shock. The pace of sales seems to be stabilizing but that's the best you could say about it. But I don't think we've hit a bottom yet," said David Wyss, chief economist at Standard & Poor's in New York.
With continued erosion in the housing and mortgage markets, businesses did their part to brace for tough economic times.
U.S. non-farm productivity in the first quarter grew at a faster-than-expected pace as workers saw the biggest cut in hours since 2003, when the economy was in a jobless recovery from its last recession.
"Continued solid productivity gains should help businesses survive the current slowdown," said Joel Naroff, president and chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
In a sign that tight consumer credit markets could be starting to loosen, U.S. consumer borrowing rose $15.29 billion in March, far more than expected and the biggest gain since November, a Federal Reserve report showed.
Overall March consumer credit rose at a 7.21 percent annual rate, to a total of $2.558 trillion as both credit card borrowing and installment loans grew at healthy paces. Analysts polled were expecting a $6 billion rise.
Major U.S. stock indexes fell more that 1.5 percent as oil prices again set record highs. Prices for U.S. Treasury debt rallied on the slide in stock, while the dollar rose.
The home sales data indicated some buyers are waiting for less restrictive lending policies, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities.
"This matches the results of the (Federal Reserve's) senior loan officer survey, which showed mortgage lenders further tightening terms of credit," he said. "The pending home sales data suggest that existing home sales will register further losses in the coming months. We expect April existing home sales to fall by about one-half of a percentage point when they are reported on May 23," he said.
Indeed, the real estate association's chief economist, Lawrence Yun, said the availability of affordable mortgages is uneven, contributing to the slowdown.
"As anticipated, we continue to look for a soft first half of the year, for both housing and the economy, before notable improvements in the second half," he said.
At the start of this year, U.S. non-farm productivity rose at a 2.2 percent annual clip, much faster than the 1.5 percent pace economists were expecting.
But the Labor Department said worker hours fell at a 1.8 percent rate in the first quarter, making it the biggest decline since the start of 2003.
The aggressive efforts to cut back on hours worked should help businesses shield their profits and keep wage-related price pressures under control.
Generally, weaker productivity amid tight labor markets can spell wage-driven inflation. But faster productivity growth may help the economy expand without sparking that wage push.
"If production is rising and employment falling then productivity has to rise. It is the only silver lining in what otherwise is a dark inflation cloud," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.
Unit labor costs, a gauge of inflation and profit pressures under close scrutiny by the Fed, rose at a 2.2 percent annual pace, slower than the 2.5 percent increases analysts were expecting.
Compensation per hour rose at a 4.4 percent annual rate, but adjusted for inflation, it rose a scant 0.1 percent.
When compared to the first quarter of 2007, productivity was up 3.2 percent and unit labor costs rose a mere 0.2 percent. Compensation rose 3.4 percent, but when adjusted for inflation it dropped 0.7 percent from 2007's first quarter.
(Additional reporting by Ellen Freilich and Jennifer Ablan in New York and Lisa Lambert in Washington; Editing by Neil Stempleman)