New-home sales surged at the fastest clip in a decade in May, and a key economic forecasting gauge moved steadily higher, spurring new debate about the economy's strength--and whether the Federal Reserve Board should do something about it.
The reports were released Tuesday as the Fed began a two-day meeting on interest rate policy.
An unexpected 7.5% jump in new-home sales during May to an annualized rate of 828,000--the highest since March 1986--"strengthens the hand of those who would argue that the Fed should be taking out anti-inflation insurance" by raising short-term interest rates to slow economic growth, said Robert Dederick, economic consultant to Northern Trust Co.
The housing report, and the Conference Board's report that its index of leading economic indicators rose 0.3% in May, the fourth straight monthly advance, helped push interest rates up across the board in credit markets Tuesday.
Yet most economists still believe the Fed will adjourn today's meeting without changing rates.
"I think Chairman [Alan] Greenspan will opt to wait" for the Fed's Aug. 20 meeting before deciding whether to boost rates, said Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis. "He will have two more [monthly] employment reports and second-quarter [gross domestic product], and its composition will give him a better fix on the economy."
New-home sales jumped in May as many buyers tried to outrun rising mortgage rates, analysts said. Sales gains were concentrated in the Midwest and South, which posted gains of 21.1% and 10.2%, respectively. In contrast, sales were off 1.6% in the Northeast and 1.7% in the West.
David Lereah, economist for the Mortgage Bankers Assn., said applications for purchase loans, which were rising in March, April and May, have started to decline.
The leading indicators index, designed to predict economic trends six to nine months ahead, measures such indicators as unemployment claims and building permits. Seven of the 11 components were higher in May; four declined.
Many economists argue that despite the economy's resilience, it is not generating significantly higher inflation and thus doesn't warrant tighter credit.
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New Home Sales
Seasonally adjusted annual rate in thousands od units:
May, 1996: 828
Source: Commerce Department