Amid Stoked Economy, Investor Jitters Grow
A batch of strong business reports Thursday jarred investors already worried about rising interest rates and provided evidence that manufacturing--long the only weak link in a sparkling U.S. economy--is reviving.
Two of the reports also suggested that employers continue to need lots of new workers, even though the nation’s jobless rate already rests at lows not seen since the early 1970s. And the latest figures show that housing, too, has kept booming.
While many analysts said Thursday’s reports probably overstate the current vigor of the economy, others fretted that the scenario could lead to higher inflation and further increases in lending costs. That, in turn, could eventually put a damper on consumer spending for houses, cars and other goods.
“A somewhat slower growth rate would be a welcome relief for the financial markets,” said Stan Shipley, an economist with Merrill Lynch & Co. in New York.
The latest reports added to fears that the U.S. economy is maintaining its torrid expansion of last year, and thus might give the Federal Reserve cause to push short-term interest rates higher sooner than later, analysts said.
Though it sounds paradoxical, a U.S. economy growing too rapidly can actually be a problem for policymakers, because it raises the prospect of higher inflation--and the prospect that the Fed will tighten credit to cool the economy and keep inflation subdued.
Earlier this week, Fed Chairman Alan Greenspan gave no indication of an imminent interest rate hike by the Fed, although he told the Senate Banking Committee that the Fed was “ready to move quickly” if conditions changed.
In the Treasury bond market--which helps determine other long-term interest rates, such as for mortgages--yields have been rising since January as investors have grown fearful that the economy’s pace will force the Fed to act.
On Thursday, the latest economic reports triggered a fresh surge in bond yields. The yield on the bellwether 30-year T-bond rocketed to 5.65%, from 5.51% on Wednesday, and now is the highest since Aug. 13.
Bond yields rise as investors demand higher returns--in this case, because they expect the Fed to eventually boost all interest rates by raising its benchmark short-term rate, now at 4.75%.
The stock market tumbled early Thursday as bond yields surged, with the Dow Jones industrial average down as much as 166 points. But the Dow recovered to close off 33.33 points at 9,366.34, though the stock market overall has been struggling since yields began to rise in January.
Perhaps the most surprising of Thursday’s reports showed orders for durable goods--which had been expected to decline slightly after December’s robust 3.4% rise--instead soared by 3.9% in January. It was the best showing in 14 months and suggested a recovery in manufacturing, which kept losing jobs over the last year even as the rest of the economy boomed.
Still, some analysts pointed out that January’s gain was pushed up by two volatile areas of the manufacturing economy, civilian aircraft and defense orders. Without the gains in those two areas, the index would have posted a small decline.
“On the surface, this looks like a very strong report. Underneath, it’s softer,” said Paul L. Kasriel, economist for Northern Trust in Chicago. The statistics suggest, he said, that “we’re going to see some moderation in capital spending and exports.”
Meanwhile, consumer spending could be getting a temporary boost from tax refunds, some economists say: The IRS said it sent taxpayers $35.1 billion in tax refunds by Feb. 12, up from $29.4 billion during the same period last year. The average refund so far this year is $1,784, up from $1,552 last year.
Despite the economy’s ongoing strength, many analysts say it’s unlikely that the Fed will lift short-term rates any time soon.
“The growth of the U.S. economy is a concern for the Fed, but I don’t think it’s going to act just yet,” said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco. “The combination of continued subdued inflation in the U.S., and lingering concern about the weakness in global markets, is going to keep the Fed on the sidelines.”
Yet a continuing rise in bond yields could spell other problems for consumers, namely a rise in costs for mortgages and other credit. That trend, in turn, might lead to a slowdown in consumer spending.
Mortgage rates already have risen for four straight weeks. The average rate on 30-year fixed-rate mortgages now stands at 6.89%, the highest level since mid-November, Freddie Mac, the mortgage company, said Thursday.
Even if rates do move up further, however, they’ll likely only return to their levels “that existed before all the [global market] turbulence last fall,” Schlossberg said.
Separately, the government reported Thursday that sales of existing homes climbed 0.8% in January to an annualized rate of 5.07 million units, a record.
But analysts said that more up-to-the-minute indicators of sales signal a tapering off in demand. They noted that the January home-sales report reflected sales that entered escrow some time ago and then closed in January.
The job market, whose strength over the last year has been a marvel to analysts, showed continued power. Initial claims for unemployment benefits fell 5,000, to 293,000, for the week ended Feb. 20. And the four-week moving average--a more reliable gauge--came to 292,500, lowest in a decade.
At the same time, the Conference Board, a research group, said its help-wanted advertising index climbed in January to its highest level since March.
* SOARING YIELDS: Bond yields jumped again, but stocks pared losses. C4
