More Signs Point to Economic Rebound
Thursday brought fresh signs that the economic recovery was speeding up, with manufacturing activity accelerating in the mid-Atlantic region and nationwide employment at least holding steady if not gaining ground.
Evidence is mounting that the economy may finish the year strongly and carry its momentum into 2004, although job creation may continue to lag, analysts said.
But as the economic outlook improves, the picture for bond interest rates, and mortgages, is worsening: Bond investors reacted to Thursday’s reports with renewed heavy selling that drove yields on two-year and five-year Treasury notes to their highest levels since last year.
The jump in those shorter-term Treasury yields suggests that more bond investors believe the day is drawing nearer when the Federal Reserve will begin to tighten credit, responding to the stronger economy.
On Thursday, however, at least three Fed officials reiterated the central bank’s resolve to support the recovery by keeping its benchmark short-term rate at the current 45-year low of 1% for the foreseeable future.
In prepared remarks to the San Diego Rotary Club, Robert Parry, president of the Fed’s San Francisco bank, said the Fed faced no pressure to raise rates in a preemptive strike against inflation, unlike during previous recoveries.
“This is the first expansion in over 40 years that began with a very low inflation rate. So the response of monetary policy isn’t necessarily going to be typical, either,” Parry said.
In separate speeches, William Poole and Robert McTeer, presidents of the Fed banks of St. Louis and Dallas, respectively, also tried to soothe bond investors by stressing low inflation and the Fed’s interest in keeping monetary policy stable for the time being.
Data on Thursday from the Fed’s Philadelphia bank helped stoke optimism about the economy. The bank said its general business index rose to 22.1 in August from 8.3 in July, far above the consensus estimate of 10. The August reading is the highest in five years, with new orders and shipments rising strongly.
The index -- based on a survey of manufacturers in eastern Pennsylvania, southern New Jersey and Delaware -- is notoriously volatile, but economists said it shows that the factory sector is improving and that plant managers expect a further pickup in the months ahead.
In another report, the New York-based Conference Board said its index of leading economic indicators rose 0.4% in July, on target with consensus expectations. It was the fourth straight monthly increase in the index, which is meant to predict economic performance three to six months ahead.
On the jobs front, initial claims for unemployment benefits, as reported by the Labor Department, fell by 17,000 to 386,000 in the week ended Saturday, the lowest level since February and below analysts’ consensus estimate of 395,000.
Last week’s Northeast power blackout may have kept some laid-off workers from filing claims, artificially lowering the overall number, economists said. Still, the claims data over the last month have been well below spring levels.
Though the economy has officially been in recovery since December 2001, 1 million jobs have been lost since then.
The latest data suggest “we’re at least not losing jobs anymore, but we’re at a standstill,” said Brett Mitstifer, portfolio manager for Value Line Investments in New York. “We probably won’t see a lot of hiring until the fourth quarter,” he said. “Firms seem to want to hold off as long as they can.”
John Lonski, economist at Moody’s Investors Service in New York, said there had been a recent surge in the hiring of temporary workers, which he said was a way for firms to fill needed jobs without locking themselves into a long-term commitment and expensive benefits.
“It remains to be seen whether the recovery is self-sustaining, that it can last long enough to finally force business to expand production and hiring,” Lonski said.
The bond market, at least, appears to believe the economy’s turnaround is for real, and that it will lead to higher interest rates. The two-year T-note yield jumped to 1.90% on Thursday from 1.80% on Wednesday, and is the highest since December. The five-year T-note rose to a one-year high of 3.44% from 3.34%.
The 10-year T-note, a benchmark for mortgage rates, rose to 4.48% from 4.44%, holding below the recent peak of 4.56% reached Aug. 13. But the average rate on 30-year mortgages nationwide edged up this week to 6.28% from 6.24% last week, according to mortgage firm Freddie Mac.
