The economy showed new signs of strength Wednesday, shaking out of the summer doldrums as housing sales picked up on the strength of lower mortgage rates and the government’s main forecasting gauge broke a four-month losing streak.
The Commerce Department reported that new home sales, a barometer of where the economy is headed, climbed 6.1% in June to the highest level in a year and a half. Helped by falling mortgage rates, sales increased in every region of the country.
The department also said its index of leading economic indicators, its main forecasting gauge, advanced in June by 0.2%. It was the first gain this year for the index.
The upbeat reports, combined with a surge in the dollar against the Japanese yen Wednesday, lend credence to the view that the nation’s flirtation with a return to recession may be fading.
“The soft landing is still very much alive,” said Gary Hufbauer, a senior fellow at the Institute for International Economics, a Washington think tank.
Said Stanley Duobinis, chief forecaster for the National Assn. of Home Builders, “Consumers seem to know that things weren’t that bad out there. They’re responding to better financial conditions.”
Ironically, the Commerce Department also issued a new method of measuring growth that showed that the economy fared worse in the second quarter than previously estimated.
Gross domestic product, measuring all goods and services produced in the United States, fell 0.2% in the April-June quarter. Just last Friday, using the traditional method, the department said the economy grew 0.5% over the three months.
The latest GDP figure--designed to factor in falling prices in recent years for computers and other high-tech goods--declined for the first time since a 2.1% drop in the first quarter of 1991.
The new system indicated that growth during last year’s robust expansion wasn’t as strong as previously thought.
“We’ve been watching the wrong speedometer. We haven’t covered the mileage we thought we had,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis, a bank holding company.
David Wyss of DRI-McGraw Hill, a forecasting service in Lexington, Mass., said the new figures reflect the reality that computer prices plunged as sales skyrocketed. “There’s more computing power sitting on my desk than we had in the whole country in 1950,” he said.
Analysts said the Federal Reserve, which cut a key short-term interest rate July 6 for the first time in nearly four years, probably would need new evidence that the economy is deteriorating before reducing rates again.
“We hit the wall in the second quarter. But we were starting to jump over it as the quarter ended,” said economist Robert Dederick of the Northern Trust Co. in Chicago.
The Fed will be closely monitoring Friday’s Labor Department report on employment. Analysts expect a small increase in the unemployment rate and a moderate gain in new jobs.
The modest improvement in the index of leading economic indicators in June was in line with other recent data pointing to recovery.
The index had declined for four straight months for the first time since six consecutive decreases in the last recession of 1990 and early 1991.