Home sales, trade gap reinforce worries about economy.

WASHINGTON -- Two reports on new home sales and merchandise trade issued yesterday disappointed analysts and reinforced the view that U.S. output will remain sluggish in the months ahead.

The Commerce Department said that sales of new single-family homes fell an unexpected 5% in July, and that the country's merchandise trade deficit swelled to $34.4 billion in the second quarter for the biggest gap in five years.

Home sales dropped to a seasonally. adjusted annual rate of 629,000 from 662,000 in June on declines in all regions of the country. The July figures marked the slowest sales pace since March, despite the disappearance of the bad weather that hurt sales earlier in the year.

"It's really disappointing news," said David Lereah, chief economist for the Mortgage Bankers Association.

Besides the July decline, the 11% sales gain originally reported for June was revised down to 3.3%. "It's clear that low interest rates are just not doing it for the housing market," said Lereah. "I think it's pretty disappointing for the Clinton administration."

Clinton administration officials have said repeatedly that they are banking on low rates to help stoke the recovery. Realtors said last week that they were optimistic that the lowest mortgage interest rates in two decades were finally helping to boost sales of existing homes, which climbed 5.4% in July to 3.69 million units, the highest level all year.

But yesterday analysts were saying that low rates alone will not make up for all the problems that continue to beset the economy, including a weak job market that still seems to be depressing consumer confidence. In fact, some economists are saying that Clinton will find that the debate on health-care reform will simply stir worries among consumers and small business about added insurance costs, acting as a drag on spending and investment.

"It's just the overall psychological environment," said Lereah, although he added that he expects to see "a little better housing market" as the year unfolds.

According to the Commerce Department report, new-home sales in the South tumbled 7.2% to 271,000, while sales in the Northeast dropped 5.8% to 65,000, and in the West sales were off 4.5% to 171,000. In the Midwest, which suffered the flood, sales slipped the least of any region -- 1.6% to 121,000.

"Basically, people are not sure enough about the economic outlook or sure enough about their jobs, to handle the big-ticket items," said Richard Berner, chief economist for Mellon Bank in Pittsburgh. Berner said he expects sales of new and existing homes this year to show moderate growth, but nothing like past recoveries.

On a balance of payments basis, the merchandise trade gap soared to $34.4 billion from $29.3 billion in the first quarter, according to the Commerce Department report. The figures are a refined version of the monthly merchandise trade figures issued by the Census Bureau and exclude military sales by U.S. defense agencies.

The wider trade gap came entirely on imports and marked the biggest merchandise trade deficit since the fourth quarter of 1987. Total imports surged 4.7% to $147.5 billion, while imports gained 1.4% to $113.1 billion.

Commerce Department officials said the main reason for the deterioration was a swing in U.S. trade with Western Europe, where a recession is cutting demand for imported goods. Total trade with the region recorded a deficit of $3.5 billion, wiping out a surplus of $1.1 billion in the first quarter.

Analysts also said low-cost imports are continuing to find markets in the United States despite tough moves by U.S. firms to become more competitive. "The risk is that some of the demand we generate here is going to get served by our competitors," said Berner.

However, the general picture of a soft economy is continuing to dampen inflationary pressures and fuel the bull market in bonds. Astrid Adolfson, financial economist for MCM Money Watch, estimated that growth is stuck in a range of 2% to 21/2%, and, she added, "it doesn't look like the third quarter is going to be any stronger than that."

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