Interest Rates Not Expected to Change
Conflicting economic reports released Monday are causing many analysts to believe Federal Reserve Board policymakers will keep short-term interest rates unchanged when they meet to discuss the economy this week.
“This is more argument to wait for more evidence,” said Robert G. Dederick, economic consultant for Northern Trust Co. in Chicago. “The evidence to date is not the sort to send out fire engines.”
On the eve of the meeting, the Commerce Department released data showing consumer spending rose 0.8% in May, the biggest advance in three months. Spending totaled $5.15 trillion at a seasonally adjusted annual rate, up from a revised $5.11 trillion in April. The increase was the largest since a 1.1% gain in February. And April’s 0.5% advance was even stronger than the 0.1% initial estimate. Consumer spending represents two-thirds of the nation’s economic activity.
The government attributed the spending increase mostly to improved automobile sales. But Chrysler Corp. on Monday reported only slight gains in U.S. sales of cars and light trucks in June compared with a year ago.
The Commerce Department report also showed personal incomes rose 0.4% to a seasonally adjusted annual rate of $6.38 trillion, up from $6.35 trillion a month earlier, when incomes advanced 0.5%.
Meanwhile, the National Assn. of Purchasing Management released a membership survey showing strength in what has been a sluggish manufacturing sector.
The association’s index of manufacturing activity rose to 54.3% last month from 49.3% in May, the highest since an identical 54.3% in February 1995.
A reading above 50% indicates growth in manufacturing. Readings above 44.5% over time suggest growth in the economy as a whole.
In yet another report, the department said construction spending fell 0.9% in May, the first decline in three months.
Residential, nonresidential and public outlays totaled $563.4 billion at a seasonally adjusted annual rate, down from a revised $568.3 billion in April.
Residential spending decreased 1.2%, including drops of 0.6% for single-family homes and 11.1% for apartments and condominiums. Nonresidential outlays were down 2.4%, including a 6.6% decline for the category that includes shopping centers.
Government spending posted the only gain, a 1.8% advance, the third straight increase.
Until recently, many analysts believed the Federal Open Market Committee would raise rates at its two-day meeting that begins today to keep the economy from overheating and causing inflation to boil over. However, recent economic reports have led analysts to suggest the committee would not act until later this year when a more complete picture is known.
“It’s my belief they will have a vigorous debate but won’t change policy,” economist Richard Berner of Mellon Bank in Pittsburgh said. “I do think that at some point, and not too far off, they will have to change policy.”
