From: Reuters
Published May 18, 2008 03:10 PM

Is the recession off? Housing holds key

By Emily Kaiser

WASHINGTON (Reuters) - Stock markets are up sharply since March. The recent batch of economic data has not looked as dire as feared. The U.S. Federal Reserve is finding fewer takers for its loan auctions. A fine-art sale drew a record $86 million price for a Francis Bacon painting.

So is the U.S. recession off? So far, so good -- or at least not so bad. However, there are still quite a few dark clouds on the horizon.

"Although GDP has been stagnant, the economy does not look to have slipped into an outright contraction during the first half of the year," said Bruce Kasman, chief economist with JPMorgan in New York.

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While that is not exactly a ringing endorsement, it is certainly a vast improvement from the bleak projections that were the norm just a few weeks ago, when markets were braced for economic disaster.

With euro zone growth coming in stronger than expected for the first quarter and emerging markets showing resilience to the slowdown in the developed world, the financial doom and gloom has given way to a renewed sense of optimism.

"The general picture that emerges is that while global growth is clearly slowing, so far it has not slowed as dramatically as many had expected," said Goldman Sachs global economist Peter Berezin.

"What will ultimately matter most is whether the better-than-expected growth momentum in the first quarter persists into the rest of the year. Here, the evidence is more worrisome," he added, pointing to the still-strained U.S. housing market, sluggish consumer demand and cautious spending on the part of businesses.

HIGH ON THE HOG

The next big test for the world economy comes on Friday, when a U.S. real estate trade group releases data on April sales of previously owned homes. It was the slumping housing market that triggered the credit crunch last summer, and a turnaround is the key to any sustainable recovery.

Last week, a survey of U.S home builders found their confidence slipped in May and was near the all-time low notched in December. However, a separate report showed housing starts up by a surprisingly strong 8.2 percent in April and applications for new building permits turned up for the first time in five months.

Other economic hot spots are showing signs of calming, too. Not only have financial markets bounced back, but several of the Federal Reserve's auctions have been undersubscribed, suggesting that banks are less desperate for cash.

The Baltic Exchange's sea freight index, which tracks global trade of raw materials, hit an all-time high on Friday, and is now 11 times higher than the lows seen during the last U.S. recession in 2001. That points to strong global demand.

In a sign of renewed confidence among the super-wealthy, a Sotheby's <BID.N> auction last week drew the highest price on record for post-war or contemporary art with the $86 million sale of a Francis Bacon painting. Sotheby's shares had fallen sharply this year after some of its auctions drew less enthusiastic bidders, raising concerns that rich buyers were cutting back.

BEARS HUMBLED?

While the bears seem to be in retreat, there are some ominous signs that the economy is not out of the danger zone.

Housing tops the list of threats, followed closely by consumer spending and inflation. In the United States, Europe and Japan, consumers have curbed spending on nonessentials as rising costs for fuel and food cut into household budgets.

Goldman Sachs expects oil prices to average $141 per barrel in the second half of the year, which would pile more pressure on strained companies and consumers. Oil hit another record above $127 a barrel on Friday.

U.S. consumer confidence tumbled to its lowest level in 28 years this month, according to the Reuters/University of Michigan Surveys of Consumers. Steep food and fuel prices in particular darkened the mood.

There is little evidence of a rebound in the U.S. manufacturing sector as businesses retrench, fearful of being stuck with bloated inventories should the economy worsen. U.S. industrial output declined in April, and two regional reports released last week showed business conditions remained weak.

"Any blue skies you see are likely to be short-lived," said Paul Kasriel, director of economic research at Northern Trust in Chicago. "The economy is in the relative calm of the eye of the business-cycle hurricane. The mortgage credit problems are not over. And credit problems in other sectors are just beginning as the housing recession spreads to the rest of the economy."

(Editing by Dan Grebler)

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