Manufacturing, home sales strong Rebounding economy could cause Fed to raise interest rates; The economy

THE BALTIMORE SUN

WASHINGTON -- The sluggish U.S. economy ended the second quarter on an upbeat note as manufacturing surged in June, and sales of new single-family homes staged a stronger-than-expected rebound in May, reports showed yesterday.

Bonds fell on the news -- pushing interest rates higher -- because it suggests that the Federal Reserve may need to boost borrowing costs later in the year to guard against a rise in inflation if the economy continues to rebound.

"These numbers are fairly jarring," said Peter Kretzmer, an economist at NationsBank Corp. in Chicago. "They're strong across the board."

A manufacturing index compiled by the Purchasing Management Association of Chicago jumped to an almost 2 1/2 -year high of 61.5 in June from 56.8 in May, while the New York purchasing managers' index rose to 64.9 from 50.8 a month earlier.

Commerce Department figures showed sales on new single-family homes advanced 7.1 percent during May after falling a revised 8.1 percent in April. That followed last week's report of a rebound in sales of previously owned homes in May.

In the months ahead, the highest levels of consumer confidence in three decades and low unemployment could provide more growth, analysts said.

Still, Fed policy-makers are not expected to raise the overnight bank lending rate at their mid-year session today and tomorrow. That is because growth in the second quarter likely fell to about a third of the first quarter's 5.9 percent annual pace. Moreover, another government report today suggests that it is still not clear whether consumers are prepared to power growth higher in the second half of the year. Commerce Department figures showed Americans' incomes and spending each rose 0.3 percent during May -- half the pace in the first quarter, when the economy expanded at the fastest clip in a decade.

In financial markets, the Treasury's benchmark 30-year bond fell 15/32, pushing up its yield about 4 basis points to 6.78 percent. The Dow Jones industrial average declined 14.93 points to close at 7,672.79.

"History would suggest this strong growth and low inflation is something that can't last forever," said Gary Thayer, an economist at A. G. Edwards & Sons Inc. in St. Louis. "There is still the risk that the economy stays strong, which means it'll be harder to keep inflation restrained."

The Chicago purchasing managers report, considered a harbinger of the national report to be released today, showed that, while Midwestern manufacturers continued to pump out goods at the highest rate since February 1995, prices fell.

The Chicago PMI production index rose to 66.4 from 58.7 -- its highest level since February 1995. The new order and inventory indexes also increased. However, the index of prices paid decreased to 53.7 in June from 56.9 in May as manufacturers continue to squeeze efficiencies out of the plants and workers.

Today's national purchasing managers report is also expected to portray growth in factory activity, though perhaps at not as fast a pace as the Chicago and New York indexes.

In the home sales report, the level of new sales climbed to a seasonally adjusted annual rate of 825,000 in May. That may translate into increased purchases of appliances and other big ticket goods, Kretzmer said.

The supply of homes for sale nationwide -- a key gauge of consumer demand -- decreased by 1.8 percent in May to an annual rate of 280,000, the lowest since July 1993. The inventory of vacant homes also fell to a 4.1-month supply, the lowest since July 1971, and a sign that builders are likely to start a flurry of new construction projects. A level above six or seven months suggests that real estate markets are saturated.

Pub Date: 7/01/97

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