Economy Surges Unexpectedly
A surge in new home sales in July and new data showing that the U.S. economy powered ahead at a faster rate than expected in the second quarter fueled new fears of inflation and higher interest rates.
The government on Thursday reported a 7.9% jump in July home sales and issued a revised annualized gain in the gross domestic product of 4.8%--the biggest rate of growth in two years.
The findings sent stock and bond prices plunging because they suggest the economy may still be expanding at a rate fast enough to spur inflation.
“There is no moderation. There is no weakness,” said William Sullivan, an economist at Dean Witter Reynolds in New York. “This thing may feed on itself. We may have explosive growth.”
Financial markets were also spooked by the possibility that the Federal Reserve Board may raise interest rates to slow the economy down. The Dow Jones industrial average ended the day down 64.73 points at 5,647.65. Bond prices fell, driving yields to a one-month high of 7.03%.
“There are no signs [the economy] is slowing appreciably in the second half of the year as the Fed has been expecting,” said economist Stephen S. Roach of Morgan Stanley & Co. in New York.
“The Fed is going to have to move unless it gets a really disappointing [employment] report next Friday from the Labor Department,” he said.
The Commerce Department reported Thursday that new home sales totaled 783,000 at a seasonally adjusted annual rate, highest since 784,000 in February. Most analysts expected a slight dip.
The 7.9% surge is the steepest since an 8.8% gain in January. All regions except the Northeast shared in the advance. Sales were up 8.8% in the West.
At the same time, the Commerce Department said the second-quarter revised U.S. GDP was even stronger than the 4.2% growth rate initially reported a month ago.
The advance in the GDP--the total output of goods and services in the United States--is the largest since that for the second quarter of 1994, when the economy expanded at a 4.9% rate. The GDP advanced 2% in the January-March period.
Many analysts and Fed officials have been expecting the economy to slow during the second half of the year. But Fed Chairman Alan Greenspan had said if signs of deceleration do not appear soon, the central bank will be forced to raise rates. Fed policymakers next meet on Sept. 24.
Signals on the economy have been mixed recently, and that includes data on the housing industry. Although new-home sales surged in July, they had fallen in the two previous months. Existing-home sales have fallen for two straight months.
Still, housing activity remains at high levels, despite 30-year fixed-rate mortgages that topped 8% from April through July. Analysts explain that other signs of a strong economy--improving job and income figures and greater consumer confidence--often offset the higher cost of borrowing.
But not all analysts are certain an interest rate boost is imminent.
“It will be difficult to rely on just one month’s numbers to decide what the underlying strength of the economy is,” said Carl Palashof of MCM MoneyWatch in New York. “So unless there’s a blowout in the employment report, I believe the Fed will keep policy steady in September.”
The GDP report shows housing activity grew at a 15.9% annual rate for the second quarter, up from 7.4% for the first.
It also exhibits few signs of inflation. A price index tied to the GDP rose 2.1% at an annual rate, down from 2.3% in the first quarter when energy and food costs accelerated temporarily.
It also says after-tax corporate profits fell 0.3%, the first decline since a 0.5% drop for the second quarter of 1995. Profits increased 6% for the first quarter.
The Commerce Department attributed the upward revision in its GDP report partly to a smaller trade deficit and more business construction than first thought.
Also, government spending shot up 8.2% after a 1.6% advance during the January-March period, when it was curbed by shutdowns.
However, the rate of consumer spending was revised downward; it grew at a rate of 3.4% rather than 3.7%. Still, that is little changed from the 3.5% advance of the first quarter. Consumer spending represents about two-thirds of GDP.
The rate of inventory rebuilding was also less than originally estimated. And overall business investment slowed, advancing just 4% after having jumped 11.6% in the first quarter.
The various changes left total GDP at $6.89 trillion for the second quarter after adjusting for inflation, compared with $6.81 trillion for the previous three-month period.
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New Home Sales
Seasonally adjusted annual rate, in thousands of units:
1996: 783
Source: National Assn. of Realtors
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GDP
Percent change in gross domestic product from previous quarter: 1996: 4.8%
Source: Commerce Department
