U.S. boom pushes ahead

Economic indicators show no signs of a slowdown soon

`A little too terrific'

Hot pace raises fears of half-point rise in interest rates

May 03, 2000|By William Patalon III | William Patalon III,SUN STAFF

Two new reports yesterday indicated continuing strength in the U.S. economy, increasing the likelihood that the Federal Reserve will keep raising interest rates in an attempt to slow growth.

A widely watched predictor signaled that the economic expansion, now in a record 110th month, would continue well into the year; a second report showed sales of new single-family homes surged in March to their fastest pace in 18 months despite rising mortgage rates.

The predictor, the Index of Leading Indicators, rose 0.1 percent in March after falling 0.3 percent in February, the Conference Board said. The index is considered a good gauge of expected economic performance over the next six months, and the increase met analysts' expectations. The February decline -- the first in five months and the largest in four years -- was labeled a "one-month aberration" by the Conference Board.

Sales of new homes rose 4.5 percent to a seasonally adjusted rate of 966,000 units, after a February decline of 0.6 percent to 924,000 homes, the Commerce Department reported. The March increase was the strongest since 995,000 homes were sold in November 1998.

Stock prices initially had a mild reaction to the two reports, but sharpened their decline later in the day. The Nasdaq composite index, loaded with volatile technology stocks, dived 172.66 points, or 4.4 percent, to end the day at 3,785.42. The Dow Jones industrial average fell 80.66 points to close at 10,731.12.

The two reports buttressed other recent releases of data that suggest the economy is so strong that the Federal Reserve may resort to a half-point increase in short-term interest rates -- instead of the generally expected quarter-point -- when its policy-makers meet May 16. The Fed has boosted rates by a quarter-point on five different occasions since last June, which has helped unsettle stocks and shake consumer confidence.

Fed move awaited

"The Fed probably will go one-half a percentage point," said Pradeep Ganguly, director of the Office of Business and Economic Research for the Maryland Department of Business and Economic Development. "The economy is certainly very strong. Gross Domestic Product is growing at much more than the expected level."

The U.S. economy expanded at a 5.4 percent annual rate in the first quarter -- down from the 7.3 percent clip of the fourth quarter but still about two percentage points faster than Fed Chairman Alan Greenspan believes is sustainable without kicking off inflation, the rise in the general level of prices which can put consumers into a cost-of-living bind.

The first quarter of this year marked the third straight three-month period with growth above a 5 percent annualized pace -- the first time that's happened since 1983-1984, when the economy was pushing aside the cobwebs of a recession.

Gross domestic product, or GDP, in the 2000 first quarter rose to an annualized, inflation-adjusted rate of $9.2 trillion -- accounting for more than a quarter of the world's economic output.

"The economy looks terrific -- a little too terrific," Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter Inc. in New York, said before the release of yesterday's housing and economic-indicators reports.

A half-point increase in interest rates could spark another steep stock sell-off, particularly if the Fed doesn't telegraph its intention. During this latest interest-rate campaign, the central bank has been noted both for gradualism -- raising rates by a quarter-point at a time -- and for managing expectations by making sure investors knew what was coming.

The home sales report showed that Americans have not been discouraged by rising rates. The average rate on a 30-year fixed-rate mortgage was 8.24 percent in March, up from 7.02 percent for the same month a year ago.

"Call it amazing, spectacular, red-hot or whatever. It does not matter. Nothing is stopping people from purchasing a new place to live," said economist Joel Naroff of Naroff Economic Advisers.

March marked the fourth consecutive month in which sales were at or greater than 900,000 -- an unprecedented performance, the government said. That strength helped push up the median price of a new home 3.1 percent to $165,000.

Forward-looking index

The Conference Board's Index of Leading Indicators is one of the few reports that's forward-looking rather than a compilation of what's taken place. Yesterday's report showed that five of the 10 index components were positive contributors, while five had a negative impact.

The five with a positive influence on the index were a decline in jobless claims, higher stock prices, a rise in consumer-goods orders, an increase in the money supply and more orders for capital goods not related to defense.

Those with a negative impact were narrower interest-rate spreads between 10-year Treasury notes and the federal funds rate, lower consumer expectations, a decrease in manufacturing-worker hours, faster supplier deliveries and declines in building permits.

Bloomberg News and the Associated Press contributed to this article.

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