The Fed Is Watched With Interest : Indicators Continue to Rise as Home Sales Soar
The government’s chief gauge of future economic activity surged again in December and sales of new homes rose to near record levels, the Commerce Department said Wednesday, raising hopes that the economic expansion will continue well into the first half of this year.
But at the same time, the two reports fueled fears that banking regulators may push short-term interest rates up soon in an effort to cool the economy and keep inflation in check.
The Commerce Department said its index of leading indicators, which forecasts economic trends six to nine months ahead, climbed for a fifth straight month in December, up 0.7% after a 0.5% gain in November.
The cumulative increase for the five months was 2.5%, the best showing since a 6% rise over seven months in 1983 when the nation was emerging from its worst slump since the Great Depression.
Three straight moves by the index in one direction are considered a good--though not foolproof--sign of where the economy will be moving in the next six to nine months.
In a separate report on sales of new homes, the department said that in December homes were sold at the briskest pace in nearly eight years, shooting up by 11.4% to a seasonally adjusted annual rate of 862,000.
Cheap interest rates fired home buyer interest, especially in 1993’s closing quarter, and bolstered the broad-based leading indicators index by pushing consumer expectations higher in December.
Noting the reports came on Groundhog Day, Robert Dederick of the Northern Trust Co. in Chicago said: “These statistics suggest that when the economists came out and looked at the numbers, they saw springtime. We aren’t going to hit a brick wall, weather permitting.”
“This rebound in sentiment demonstrates that, after being buffeted by stagnation and recession, consumer optimism is beginning to grow once again,” Commerce Secretary Ron Brown said.
Consumer purchases of goods and services fuel about two-thirds of national economic activity, so more optimism is a bulwark for continuing growth.
Private economists welcomed the brisk economic momentum at 1994’s beginning but cautioned that stimulus from key sectors like housing will moderate and also noted that price pressures are rising.
“It would be difficult to sustain this level of activity in housing,” said Michael Carliner, an economist with the National Assn. of Home Builders. “I’m not even sure that we could build houses at this pace.”
During all of 1993, the number of new homes actually sold rose 9.7% to 669,000 from 610,000 in 1992--the highest sales in five years since 676,000 in 1988.
That drained the supply of new homes for sale to the lowest in more than 20 years. Only 4.5 months’ worth of finished homes were available at December’s sales pace, down from 4.8 months’ worth of homes in November and the smallest inventory since 4.1 months in July, 1971.
Carliner pointed out “a lot of upward pressure on prices,” especially from higher costs to buy lumber, gypsum wallboard, insulation and land on which to build houses.
Some of the same pressures were evident in December’s leading index because the main positive influence on it after rising consumer expectations was higher commodity prices.
In total, eight of the 11 separate measures in the leading index gained from November levels. Two weakened and one--the average workweek--was the same in both November and December.
Economist Marilyn Schaja of Donaldson, Lufkin and Jenrette Securities Corp. in New York said rising prices that affected the leading index also were evident in Tuesday’s report from the Assn. of Purchasing Management, which showed factory business on the rise in January.
“The NAPM index is indicating that inflation may be heating up a bit,” Schaja said.
Index of Leading Indicators
Seasonally adjusted; 1987 = 100
Jan., 1993: 98.9 Dec., 1993: 100.3
Source: Commerce Department
