Forecasting gauge points to recovery

December 30, 1993|By Los Angeles Times

The government's chief gauge of future economic strength rose a healthy 0.5 percent last month, and home sales nationwide hit a record high, according to reports released yesterday. The reports appeared to assure that the recovery will continue well into next year.

Rising orders for manufacturing equipment and fewer first-time lTC claims for unemployment benefits helped push the closely watched Index of Leading Indicators higher in November for the fourth month in a row, the Commerce Department reported.

In a separate report, the National Association of Realtors said homes sales last month bucked the traditional year-end slowdown. Sales jumped 2.9 percent, to a seasonally adjusted rate of 4.21 million units for the year -- the fastest sales pace since the trade group began keeping such figures in 1968.

"If anybody thought that the new year was going to start off on shaky ground, I think their doubts have been blown out of the water," said Sung Won Sohn, chief economist of the financial-services company Norwest Corp. in Minneapolis. "The recovery is right on track, and we should see solid growth at

least through the first six months of '94."

Some analysts had expressed concern that the economy has been growing too fast recently and that the recovery could run out of gas inthe first half of next year.

But the 0.5 percent rise in November's leading indicators -- an index designed to forecast economic strength six to nine months from now -- is a sign that the economy will probably continue to grow modestly well into next spring.

In all, eight of the 11 economic indicators that the Commerce Department uses to compile the index showed strength last month.

Among them, orders for manufacturing equipment jumped, new claims for jobless benefits dropped and permits for construction projects rose. The length of the average workweek grew.

Analysts said that longer workweeks and the growing backlog of orders for merchandise bode well for employment. Businesses may be forced to hire employees instead of squeezing more work out of their existing staffs.

"Sooner or later -- and I think it will be sooner -- more employers are going to have to start hiring, because they just can't get by with the skeletal staffs they have now," Mr. Sohn said.

The Realtors' report on home sales surprised many housing analysts who had been expecting sales to drop as the holidays approached.

"Mortgage rates began to creep up a little in the fall, and I think that convinced a lot of people to quit procrastinating and finally buy a home," said John Tuccillo, chief economist of the National Association of Realtors.

Although most analysts cheered yesterday's reports, some said they were worried that the Federal Reserve Board might still nudge up short-term interest rates sometime soon to keep the economy from overheating. If rates are raised, consumers with adjustable-rate credit cards would likely feel the pain first, because their payments would rise almost immediately.

"Then you'd see rates on most new auto loans climb, because they react a little more slowly," said Cynthia Latta, an economist at DRI/McGraw Hill in Boston.

But Ms. Latta said she does not expect the Fed to raise rates until March at the earliest.

Many home buyers are already feeling the pinch caused by the rebounding housing market.

A construction boom in most parts of the nation has sent lumber prices soaring more than 50 percent over the past few months, adding $4,000 to the cost of building a typical house.

And builders in stronger housing markets have responded by raising their sales prices.

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