Data Point to U.S. Growth

New data on the economy are pointing to continued decent growth, reinforcing the likelihood of another Federal Reserve interest rate hike next month, analysts said Wednesday.

“No turkeys in sight,” brokerage Goldman, Sachs & Co. wrote to clients in a note about the latest economic reports:

* New-home sales edged up 0.2% to a 1.23-million-unit annual pace in October, the third highest on record, the Commerce Department said.

* New claims for unemployment benefits last week fell a larger-than-expected 12,000 to a two-month low of 323,000, the Labor Department said.

The four-week average of claims, which economists watch for a better sense of the trend in the labor market, dropped to the lowest level since early 2001.

* Factory orders for durable goods such as cars and appliances slipped 0.4% in October, the Commerce Department said. The so-called core category of non-defense capital goods orders, excluding aircraft, dropped 3.6%.

The report was disappointing on the surface because it suggested caution by businesses in their capital spending. But the decline was tempered by an upward revision of the September report to show a 5.2% surge in non-defense orders, up from the 2.8% gain originally reported, the government said.

Overall orders for September, including defense orders, were revised to show an increase of 0.9%, compared with the 0.2% first reported.

* U.S. consumer confidence ticked up this month, according to a University of Michigan index. It rose to 92.8 from 91.7 last month, Reuters reported, citing sources that had seen the subscription-only report. But the initial index reading for November was 95.5.

All in all, the data Wednesday suggest “a very solid economy,” said Allen Sinai, head of Decision Economics Inc. in New York.

David Rosenberg, an economist at Merrill Lynch & Co. in New York, revised his estimate of fourth-quarter economic growth to a 3.5% annualized rate from a previous forecast of 2.5%.

“A seemingly decent start to the holiday shopping season and a better job backdrop leave us with the view that consumer spending this quarter will rise at a 3% annual rate,” Rosenberg said. That would be up from the 2.5% rate he had expected.

The economy’s resilience also means the Federal Reserve is virtually certain to raise its benchmark short-term interest rate when policymakers meet Dec. 14, analysts said. The Fed’s rate, now 2%, is expected to be raised to 2.25%, the fifth increase this year.

The only potential obstacle to another rate hike would be a disastrous report on November employment, economists said. The Labor Department will issue that report Dec. 3. Many analysts believe that it will show the economy produced a net gain of about 200,000 jobs this month, compared with an increase of 337,000 in October.

Shorter-term interest rates, such as on two-year Treasury notes, have continued to climb in recent weeks, reflecting Wall Street’s expectations of another Fed rate increase soon.

The yield on the two-year T-note ended at 3.03% on Wednesday, up from 2.95% on Tuesday and the highest level in more than two years.

But yields on longer-term bonds have been tame. The 10-year T-note yield, which edged up to 4.20% on Wednesday from 4.19% on Tuesday, has been trending sideways since late August.

That has kept other long-term interest rates subdued, including mortgage rates. As a result, “the housing market remains robust,” Goldman Sachs economists said in their report to clients Wednesday.

Although higher home prices have hurt affordability for some buyers, overall “affordability remains reasonably good for now, and a pronounced deterioration is unlikely until interest rates increase more substantially,” the Goldman economists said.

As for the business sector, the dollar’s latest slide could help boost the export prospects of U.S. manufacturers, analysts say.

That could improve the outlook for durable-goods orders in 2005.

“The big plus is going to be better exports” as the dollar drops, Decision Economics’ Sinai said.

In the meantime, the decline in unemployment benefit claims is boosting optimism about the labor market’s near-term prospects, Sinai said.

“The jobs count has picked up and wages are rising, and that’s the fundamental underpinning for spending by consumers,” he said.