Fed Rate Cut Expected Despite Upbeat Signals
Stronger-than-expected results in three economic reports Tuesday offered signs of a hoped-for turnaround, but the evidence is probably still too slight to have much effect on the Federal Reserve Board’s interest rate decision today, experts said.
Tuesday’s numbers on consumer confidence, durable goods orders and new-home sales gave “a fairly good indication that the economy is coming out of hibernation and beginning to squirm and move,” said Sung Won Sohn, chief economist at Wells Fargo & Co.
Sohn said he was most encouraged by a Conference Board report showing a second straight monthly improvement in consumers’ view of where the economy will be six months from now. The so-called expectations index, based on a survey of 5,000 households, rose to 93.2 this month from 87.1 in May and 79.1 in April.
On the other hand, the board’s index of current conditions dropped to 154.8 from 159.6 in May. Combining the two measures, the overall confidence index crept up to 117.9 from 116.1 a month ago.
“People are feeling better about the future,” Sohn said. “That’s important because that’s what it takes to get them to buy houses and durable goods.”
On the housing front, new-home sales continued strong, rising to an annual rate of 928,000 in May, up from 921,000 in April, according to the Commerce Department. That report came on the heels of a stronger-than-expected number for existing-home sales Monday.
The housing market has been a steady source of strength in the economy, even as corporate earnings, industrial output, employment and other key measures have struggled in the last year. Home sales have been buoyed by falling mortgage rates, a result of the vigorous rate-cutting campaign the Fed initiated earlier this year.
“I don’t know of anyone who expected home sales to stay this strong this year,” said Russ DeVol, regional economist at the Milken Institute in Santa Monica. “People are not overly concerned about their job prospects if they’re still buying homes.”
Tuesday’s report on durable goods orders, also from the Commerce Department, was a mixed picture.
New orders for durable goods such as automobiles, machinery and computers rose 2.9% last month, after falling a revised 5.5% in April.
Although the automotive sector saw strong orders, technology continued to be very weak, several economists said.
Orders for non-defense capital goods, which DeVol called an indicator of future investment plans by business, rose a modest 0.9% in May, after plunging 5.5% in April.
“Year-over-year, non-defense capital goods are still down 7% to 7.5%, and there’s no sign they’ve stopped collapsing yet,” DeVol said.
Dean Baker, an economist at the Center for Economic and Policy Research in Washington, said there was nothing in Tuesday’s reports that should keep the Fed from lowering its key interest rate by an additional one-half of a percentage point today.
Even the strength in housing sales may be transient, Baker said, noting that “for sale” signs in his Washington neighborhood are staying up longer these days, whereas a few months ago, homes were being bid up above the asking price almost as soon as they went on the market.
“We’re losing jobs, the stock market’s flat, [corporate] earnings are terrible--how long can people continue to buy homes at such a rapid rate?” he said.
For the economy to regain strength, business investment must pick up, and the signs of weak spending on telecommunications equipment and other technology items don’t augur well for that happening quickly, Baker said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
New-Home Sales
Seasonally adjusted annual rate, in thousands of units:
May: 928,000
Source: Commerce Department
*
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Durable Goods
New orders, in billions of dollars, seasonally adjusted:
May: $188.5 billion
Source: Commerce Departmen
