HOUSING STARTS
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Feeling the pinch
Americans are quick to spot a tale that is altogether too good to be true. So when they hear that last year’s recession was all a mirage, or that the economy is already back on track, many smell a rat.
Hyperventilated talk of a “pause that refreshes” or paeans of praise for an ultrarapid recovery ring hollow with the 1.5 million people who have been thrown out of work. Then there are those state government leaders who wonder where the revenue went.
Further, if there was no recession, why did the Federal Reserve push short-term interest rates to a 40-year low?
Yet one area of the economy has stoutly resisted any and all talk of slowdown: construction, which is in the midst of a boom while manufacturing totters off the canvas.
Economist Sung Won Sohn expects Wednesday’s report on February housing starts to show a dip of about 5 percent, to an annual rate of 1.59 million units from 1.68 million a month earlier.
“The weather last month was a bit less friendly, and we are seeing some upward pressure on mortgage rates,” said Sohn, of Wells Fargo & Co. in Minneapolis. “The housing industry is in a tug of war, with rates ticking higher while the economy has not yet fully recovered.”
He said housing construction “during the balance of this year will soften from last year’s record pace.”
Sohn said builders are faced with an enormous unfilled demand for affordable homes, but some opulent houses are sitting on the market, unsold.
FEDERAL RESERVE
Rate clock ticking
Interest rates will be on the agenda Tuesday, when policymakers of the Federal Open Market Committee gather to discuss monetary policy. Chicago economist Brian Wesbury believes the clock is ticking on a tougher stance by the central bank.
“At 1.75 percent, the federal funds rate is well below a neutral level. If the Fed does not increase interest rates this year, inflation will accelerate in 2003 and beyond,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
He said policymakers will need to boost the short-term rate “to bring it into line with fundamentals. To do this, the Fed will need to boost the funds rate to 3.25 percent by year-end and then to roughly 4.5 percent by mid-year 2003.”
Wesbury believes the central bank on Tuesday will adopt a so-called neutral stance, indicating that the danger of a slowdown is equal to concerns about inflation. He believes policymakers will start notching rates higher in June or August.
CONSUMER PRICES
The oil factor
Analysts expect Thursday’s report on the February consumer price index to show a modest increase, on the order of 0.2 percent. But further fireworks on the inflation front may be near.
Economist Ian Shepherdson said the data “likely will show no meaningful change in gasoline prices.” But, he added, “March will be very different. If retail gas prices continue to rise in line with wholesale prices, the March CPI could suffer a gas price hit of 0.4 percent.”
Shepherdson, of High Frequency Economics in Valhalla, N.Y., said his forecast assumes no further rise in crude oil prices, “which is far from a safe bet.”
Also on tap this week: the January trade deficit on Tuesday, and February leading economic indicators on Thursday.
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EQUITIES
March follies fade
The early days of this month were described by some analysts as March Madness, as the stock market zoomed to levels not seen since last summer. But a more subdued, tentative mood has set in during recent sessions, as investors question the vigor of the economic rebound.
With only nine trading days left in the first quarter, the subject of earnings will soon return to Wall Street’s front burner. Investors’ biggest worry is that the recovery will prove to be so mild as to prove nearly profitless. That would mean stocks already are fully valued.