Foreclosures and unemployment rise as traders reconsider the bullish scenario

In yet another sign that the budding recovery in the U.S. economy remains very weak, data released today on both foreclosures and the weekly claims on unemployment benefits were quite negative, surprising the markets.

In spite of a 0.7 percent gain expected by economists, retail sales fell by 0.1 percent in July, according to the U.S. Commerce Department. But the headline number implies a much stronger picture for consumer demand than the underlying demand situation suggests. The German-inspired car-for-clunkers program which boosted car sales by 2.4 percent last month inflated the consumer spending number significantly, but still wasn’t enough to prevent a sub-zero release. Excluding autos, retail sales fell by an unpalatable 0.6 percent.

Meanwhile, data released by the Labor Department showed that the number of unemployed persons applying for jobless benefits rose to a seasonally-adjusted 558,000 this week, up from last week and much above the 545,000 expected by analysts. On a more positive note, continuing claims data fell by a larger margin than what was anticipated by economists. The four-week average, used to smooth out the volatility of the series, on the other hand, has reversed six straight weeks of declines and rose to 565,000.

In an economy where consumer spending accounts for about seventy percent of GDP, it is clear that a solid recovery will be strongly dependent on the consumer regaining his appetite for spending. Yet battered by foreclosures, plunging household net worth, credit card defaults and bankruptcies, and a very difficult labor market, many are giving up any plans of indulging in a spending bonanza any time soon.

Indeed, data released by Realty Trac Inc, today showed that foreclosures filings in July rose by 32 percent in July over the same month of last year, and the overall number of households entering the foreclosure process rose by seven percent. At the moment one in 355 homes is at some stage of foreclosure, which is the highest level of this crisis, confounding expectations of a turnaround.

Overall, today’s data once again illustrates the fragile nature of the recovery the Federal Reserve is seeking to create, in addition to the exceptionally stressed circumstances faced by both U.S. businesses and consumers. The bulls tie their hopes to the age-old belief that it is wrong to bet against the Fed: the institution which dominates the money channels should be expected to have the power to kick the nation out of the recession. Americans are entrepreneurs, and given the tools, they will sort out the problems. That there’s a lot of unsatisfied demand in many emerging economies also implies that a little bit of stimulus may eventually create its own dynamism and take us out of this slump. Bears  on the other hand claim that the processes unleashed by the turmoil of the last year will take years to sort out and remedy. Today’s releases are unlikely to convince anyone to abandon their favored approach, but they clearly alert us to the long term dangers, and weaknesses faced by the battered American economy.