New indicators point to slowing economy

New home sales dipped in April, while a forecast of economic performance suggests a slight drop in optimism.

©Associated Press

© St. Petersburg Times, published June 1, 2000

NEW YORK -- The Federal Reserve's interest rate increases appear to be slowing the economy, with reports Wednesday of a steep decline in sales of new homes in April and a dip in a barometer of future economic activity.

Analysts said the figures added to evidence of a minor softening of the economy, with the growth rate easing slightly. But with the labor market likely remaining tight, inflation-fighters at the Federal Reserve are expected to continue a campaign of raising rates to keep growth at a sustainable level.

On Wall Street, the unexpected signs of slowing set off a rally in the inflation-sensitive bond market, but stocks gave ground after Tuesday's sharp gains. The Nasdaq Composite Index, which rose a record 7.9 percent Tuesday, fell 1.7 percent, or 58.57, to 3,400.91. The Dow industrials dipped 4.80 points Wednesday to 10,522.33.

The Commerce Department reported in Washington that sales of new homes dropped 5.8 percent in April, the biggest decline since September and a reversal of a similar increase in March.

The decline in home sales was accompanied by a drop in the median price of homes, which declined 2.2 percent to $161,400, the lowest level since October. The median price, the point at which half the homes sold for more and half for less, had risen to $165,000 in March.

In New York, the private business-supported Conference Board said the Index of Leading Economic Indicators, which attempts to gauge the economy three to six months in the future, declined by 0.1 percent in April.

Analysts had expected the leading indicators index to advance slightly in April on a strong increase in the factory work week. Instead, it was pulled down by interest rates and a decline in manufacturers' new orders.

"The data suggest that some sectors may be beginning to respond to Fed tightening," said economist Ken Goldstein at the Conference Board.

Since last June, the Federal Reserve has increased interest rates six times to keep inflation under control by raising the cost of borrowing for consumers and business and slowing economic activity. The latest increase, on May 16, was one-half percentage point, or 50 basis points, unlike the five previous increases of one-quarter point.

"We are seeing a deceleration . . . to a growth rate that is still above potential, so the Fed is likely to tighten by another 50 basis points," said Kathleen Stephansen, a senior economist at Donaldson, Lufkin & Jenrette Securities Corp. in New York.

Mortgage rates have risen with the Fed's increases, and 30-year mortgages now are averaging 8.62 percent, up more than a full percentage point from a year ago and at a level last seen in 1995.

The drop in sales of new single-family homes, to an annual rate of 909,000, was the biggest since a 7.2 percent decrease in September. Sales had jumped 5.8 percent in March, pushing the pace to 965,000 homes, the second-highest level in history.

"When you look at the absolute level . . . this is really a stabilization," Stephansen said. "It still leaves you with a housing sector that is relatively strong in the current quarter."

Economist Joseph Carson at investment bank UBS Warburg LLC in Stamford, Conn., said the decline in the leading indicators "does indicate a little bit of a change in trend."

The index stands at 106 after increasing 0.5 percent the past six months. The index stood at 100 in 1996, its base year.

The recent decline adds to mounting evidence that the economy is slowing, Carson said. However, growth is likely to continue at a pace that will keep workers in tight supply, prompting more rate increases by the Fed.

In other economic news, the government said Wednesday that consumers spent $5.26-billion shopping on the Internet during the first three months of this year, an increase of 1.2 percent from the previous quarter.

Total retail sales during the period were $747.8-billion, meaning that 70 cents of every $100 in retail sales were spent online, the Commerce Department estimated.

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