THE ECONOMY: HOW STRONG? : Home Sales and Consumer Spending Fall : Indicators: April figures offer evidence that the Fed’s strategy of raising interest rates to control growth is working.
The Commerce Department said Tuesday that new home sales fell 6.8% in April while overall consumer spending also declined, providing fresh evidence that the Federal Reserve Board’s controversial strategy of raising interest rates to keep the economy from overheating appears to be working.
Government analysts and private economists alike blamed the slowdown in U.S. home sales on higher mortgage rates, which began to rise sharply just after the central bank began pushing up short-term interest rates in February.
New home sales in the West, where California accounts for about half of all construction activity, fell 5.7% from March.
In a separate report, the department said overall consumer spending--which accounts for about two-thirds of the nation’s economic growth--slipped 0.1% in April from March, as many Americans put away their credit cards and took out fewer loans. The decline in spending came despite a healthy 0.4% increase in the average family’s income.
And in a sign that higher interest rates are shaking some Americans’ faith in the future of the economy, the business-funded Conference Board said consumer confidence dropped in May after having risen in the two previous months.
“The Fed raised rates to cool off the economy, and that’s exactly what is happening now,” said David Seiders, chief economist for the National Assn. of Home Builders in Washington. “Everyone is going to be watching over the next few months to see just how cool the economy will get.”
Most analysts said Tuesday’s three reports are the latest evidence that the economy is slowing to a sustainable growth rate--in the 3% annual range from its breakneck 7% in the last three months of 1993.
“We have begun a transition here, moving from an economy that was growing too fast to an economy that is growing at a rate it can handle for two or three more years,” said Joe Carson, Dean Witter Reynolds’ chief economist in New York. “People shouldn’t get worried about this slowdown. They should welcome it.”
The April drop in new home sales was blamed largely on a rise in 30-year mortgage rates, which have climbed sharply since the Fed started pushing short-term rates higher four months ago.
Mortgage rates stood at about 7% when the Fed launched the first of four increases in the federal funds rate in early February. They have since risen to about 8.5%, which has added more than $150 to the monthly cost of a $150,000 new home loan.
“A lot of first-time buyers who were shopping for a new home just a few months ago have been knocked out of the market by the higher rates,” said Seiders, the builders economist.
Although Seiders agreed that the Fed’s rate increases should keep the economy from overheating, he added that the higher rates will be especially costly to the construction industry.
Seiders had originally forecast that 1.228 million houses would be built in the United States this year, but he recently lowered that estimate by 56,000--a reduction that would lead to the estimated loss of some 110,000 construction jobs in 1994 and thousands more in related industries.
The Commerce Department report showing that overall spending by consumers slipped 0.1% in April from March shows that would-be home buyers are not the only ones tightening their purse strings.
Spending on a broad range of items--from food and fuel to new cars and appliances--fell for only the second time in 13 months, even though the typical American’s income from wages and investments climbed 0.4%.
“Some people get nervous when they see interest rates go up, so they put their wallets away and avoid going into more debt until they start feeling a little better again,” said Robert Barr, deputy chief economist of the U.S. Chamber of Commerce in Washington.
Barr said many consumers may also have been strapped for cash after paying their federal income taxes, which were due April 15. He noted that disposable income--the money left over after federal and state taxes are paid--fell 0.2% in April after rising a strong 0.6% in March.
Nonetheless, Americans clearly seem to be getting increasingly jittery about the future of the economy.
The Conference Board said Tuesday that its consumer confidence index slipped to 87.6 in May from 92.1 in April. It was the first time since February that the index registered a decline.
New Home Sales
Seasonally adjusted annual rate, in thousands of units: April, 1994: 683
Source: Commerce Department
Personal Spending
Seasonally adjusted annual rate, in trillions of dollars: April, 1994: 4.60
Source: Commerce Department
