WASHINGTON - A blockbuster report from the factory sector shows that the U.S. economy is shifting into high gear, portending an end to the period of super-low interest rates, economists said.
The Commerce Department said yesterday that U.S. orders for big-ticket durable goods jumped a surprisingly strong 3.4 percent last month after an upwardly revised 3.8 percent gain in February.
The orders for long-lasting items such as airplanes, cars and washing machines shattered Wall Street forecasts of a 0.7 percent rise and suggested that the U.S. factory sector is stronger than had been thought.
The rise "shows the robust state of manufacturing activity," said Bank One economist Anthony Karydakis.
"The economy is now firing on all cylinders," said Sung Won Sohn, chief economist at Wells Fargo Bank, pegging first-quarter economic growth at 5 percent. "Consumers are spending, business investment is ramping up, exports are rising and inventories are being rebuilt."
Citigroup currency strategist T.J. Marta called the report "explosive," and said it could "could put upward pressure on U.S. interest rates," thus supporting the dollar.
The federal funds base rate of 1 percent is at its lowest level since the 1940s. Economists say that is the result of an effort to avert a deflationary trend and support a weak economy.
Yet this surprisingly strong growth, together with high oil prices and increasing labor market pressures, is fueling concern about inflation.
Until now, Fed Chairman Alan Greenspan and other members of the central bank have played down the inflation threat. But some economists are worried. "In reality, strong inflation poses a much bigger risk to the markets than strong growth," said Lehman Brothers economist Ethan Harris.
"If growth is strong, the Fed's objective will be to raise interest rates enough to slow growth back to trend. ... By contrast, if inflation is truly rising above acceptable levels, the fundamental picture for the markets is more dire. The Fed will be forced to tighten enough, not only to lower GDP growth, but also to push growth below trend and risk a recession. This is because once the inflation genie is out of the bottle it is hard to put it back in."
Federal Reserve Vice Chairman Roger Ferguson said yesterday that although the threat of deflation appears to be over, the central bank needs to be vigilant to stem inflationary pressures.
"Now the process of disinflation appears to have ceased, and inflation has apparently stabilized," he said. "However, we cannot be complacent regarding inflation and inflation expectations. Should the Federal Reserve conclude that the maintenance of price stability is in jeopardy, I am confident that it will act appropriately."
Federal Reserve Governor Ben Bernanke said Thursday that he is "sanguine" about inflation.
"I see no indication that the U.S. economy is in imminent danger of overheating," he said. "Productivity growth is keeping the lid on labor costs, and the effects on inflation of the increases in commodity prices and the decline of the dollar to date, which are likely to be small in any event, may well have dissipated a year from now."
Still, economist Joel Naroff of Naroff Economic Advisors said the Fed is likely to shift its tone at its May 4 gathering of policy-makers "and warn that the crises-created, historically low interest rates cannot last forever."
U.S. stocks gained modestly after the report. The Dow Jones industrial average climbed 11 points to close at 10,472, and the Nasdaq composite index advanced 16 points to 2,049.