Economists forecast the nation's total output grew at an annual rate of 3.3 percent between July and September, after contracting for a record four straight quarters. That growth has been fueled by a huge influx of government cash, including a temporary tax credit for first-time homeowners and a $1.25 trillion Federal Reserve program to keep mortgage rates low.
Both efforts are likely to end by next summer, and the housing industry is already feeling it. New home sales in September unexpectedly fell 3.6 percent, the first decline since March and a distinct sign of weakness in a market that had rebounded strongly over the summer.
Homebuilders are traditionally big employers, but the industry isn't hiring yet because there's a glut of homes on the market. There were 251,000 new homes for sale at the end of September, or about 7.5 months' supply at the current sales pace. That's about two months too much.
While the unemployment rate fell slightly in most metro areas in September, the trend was fueled by discouraged job seekers leaving the work force, according to government data released Wednesday. The rate fell in 223 of 380 metros, or almost 60 percent. The jobless rate rose in 123 areas, and was unchanged in 34.
"The job market is not recovering at all yet," said Jim Diffley, regional economist for IHS Global Insight. "We're looking at another jobless recovery."
That may be happening in the manufacturing sector, which has also been pumped up by government building projects. September orders to factories for big-ticket manufactured goods rose 1 percent last month - not a huge increase but an improvement from a 2.6 percent drop in August, the government reported Wednesday. Demand for machinery offset weakness in commercial aircraft and autos.
That report, however, was not enough to distract investors from the disappointing unemployment and housing reports. Stocks fell Wednesday with the Dow Jones industrial average down 119 points, or 1.2 percent, to 9,805.01.
Shares of homebuilders also tumbled. Hovnanian Enterprises Inc. led the way, falling 3.9 percent, or 41 cents, to $3.89.
The drop in new home sales could help lobbying campaigns by real estate agents and homebuilders who want Congress to extend the tax credit of up to $8,000 for first-time buyers.
"Seeing a number like this today, I think a lot of lawmakers will be pounding their fists on the table" arguing to extend the credit, said Jennifer Lee, an economist with BMO Capital Markets.
Senators agreed Wednesday to extend the tax credit until June 30, as long as buyers sign sales agreements by April 30. Lawmakers were considering adding a credit for home buyers who already own homes, perhaps allowing up to $6,500 for people who have been in their current home at least five years. Details were still being negotiated.
Critics, however, say many buyers would have made their purchases anyway and call the government incentives an unnecessary subsidy for people who don't need it. And extending tax credit may have a limited affect, they say.
"Most people who receive the tax credit are people who would have bought a house anyway," said Ted Gayer, an economist at the Brookings Institution. "That's a big windfall at taxpayers' expense."
New home sales fell to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. Economists surveyed by Thomson Reuters had expected a pace of 440,000. However, they are still up 22 percent from the bottom in January, and analysts don't expect them to recede too far.
"We're starting to climb out of a very deep, dark cave," said Adam York, an economist with Wells Fargo Securities. "It's going to be a long process."
The report provides a timely view of the housing market because it reflects signed contracts to buy homes, rather than completed sales. It's taken longer this year to finish deals because buyers face delays in getting approved for a mortgage and having the property appraised.
Sales have begun to slow in Nevada as buyers realize they may already be too late to qualify for the tax credit, said Allen Morris, a senior vice president for Warmington Residential. The tax credit has been the major draw in the builder's Nevada communities, where homes are priced between $150,000 and $225,000.
"We're excited about the prospects of having the tax credit extended," he said.
Sales in September were off 7.8 percent from a year ago and are down more than 70 percent from the peak in July 2005.
The median sales price of $204,800 was off about 9 percent from $225,200 a year earlier, but up 2.5 percent from August's $199,900.
The drop in sales was driven by a nearly 11 percent decline in the West and a 10 percent drop in the South. Sales rose 35 percent in the Midwest and were unchanged in the Northeast.