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Economic recovery falters: Does it signal recession or just a ‘pause’?

The latest batch of economic news, including trouble in sales of new homes and in orders for durable goods, has focused investors on one issue: Just how durable is the economic recovery?

The latest batch of economic news, including trouble in sales of new homes and in orders for durable goods, has focused investors on one issue: Just how durable is the economic recovery?

The Dow Jones Industrial Average hovered at the psychologically important 10,000 level Wednesday, dipping below that mark for part of the morning.

Worry that the United States may be dipping back into recession is on the rise. Another view, held by many forecasters, is that the summer slowdown represents a “pause” in growth – disappointing but not disastrous.

Either way, the outlook for the economy has dimmed at least marginally in recent weeks. The changed outlook appears to be affecting investors more than the relatively upbeat earnings that corporations have reported in the past few weeks for the year’s second quarter.

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The latest economic numbers came Wednesday morning.

Durable-goods orders from US factories posted a rise of 0.3 percent in July, but the gains came entirely from the volatile transportation sector (aircraft and autos). Core indicators such as orders for machinery, computers, and fabricated metals fell for the month. That raises worries that the bellwether manufacturing sector is losing its momentum.

Separately, the government reported, sales of new homes dropped 12 percent in July to a record low level. That comes a day after an equally disappointing report on sales of previously owned homes. A widely watched index of home prices, from the Federal Housing Finance Agency, fell 0.3 percent in June.

The reports suggest that, after a federal tax credit luring home buyers came to an end, the housing market faces considerable weakness. Still, in a sign that real estate is not in a fall-off-a-cliff scenario, mortgage applications rose last week for both refinancing and new purchases, according to a Wednesday report from the Mortgage Bankers Association.

All this comes after other recent reports have shown mixed signals.

The job market has clearly cooled. In a report last week, weekly claims for unemployment insurance rose unexpectedly to 500,000.

But bank lending conditions have improved a bit. And key indexes viewed as leading indicators for the overall economy, for manufacturing, and for the service sector have remained positive, although not robustly so.

Economists are far from perfect at identifying key turning points, such as a dip into recession. So it’s not surprising that the latest numbers are stirring sharp debate among forecasters. Is it a pause? A double dip?

Here are some of the prominent views:

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It’s just a pause. Michael Darda, chief economist at the investment firm MKM Partners, blames the slowdown largely on the ripple effects of the European debt crisis this spring. That hurt financial conditions in U.S. markets as well, but only temporarily. In a Monday report, Darda says, the pace of mortgage applications “appears to be bottoming after a steep fall.” He predicts a gradual recovery in home sales based on record affordability (low interest rates and home prices) and some easing in lending standards.

A double dip may be arriving. Charles McMillion, an economist at MBG Information Services, sees the durable-goods and housing numbers as confirmation that the economy is in a period of stagnation at best. “Odds that the economy is again sliding into overall decline are now at least 50/50,” he wrote Wednesday.

The U.S. is stuck in low gear. Jan Hatzius, chief US economist at Goldman Sachs, expects the economy to grow at a barely perceptible 1.5 percent rate between now and the early part of 2011. “The forecasting community has only partially caught up with the deterioration” in the economy, he wrote Monday. The Federal Reserve, for instance, appears to have based recent decisions on a forecast of above-trend growth of about 3 percent.