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November 29, 2005

Sales of New Homes Stay Strong in October, Setting Record

By VIKAS BAJAJ

Gasoline is cheaper than it was before Hurricane Katrina slammed into New Orleans. Consumer confidence jumped last month and new home sales hit a record. The stock market has been rising. Even the nation's beleaguered factories appear to be headed for a happy holiday season.

By most measures, the economy appears to be doing just fine. No, scratch that, it appears to be booming.

But as always with the United States economy, it is not quite that simple.

Consumer confidence is bouncing back from what was arguably some of its worst readings in years. Gasoline prices-the national average is now $2.15, according to the Energy Information Administration- have fallen because higher prices tamped down demand and supplies in the Gulf Coast have been slowly restored. The latest read on home sales, released today, contradicts virtually every other recent measure of housing activity that generally indicate a slowdown. And yes, manufacturers' fortunes are on the mend, but few besides airplane makers are celebrating.

It all means that the economy is likely to end the year with a splash, but that does not mean the broad economic picture next year will be even better. Indeed, the Organization of Economic Co-operation and Development said today that the United States economy is likely to be a repeat of 2005. The O.E.C.D. projected that 2005 growth will settle at 3.6 percent, down from 4.2 percent in 2004. The O.E.C.D. also forecast 2006 growth at 3.5 percent, but other economists think that may be too optimistic.

Now investors, whose stock-buying had been fueling an end-of-year rally, fear that the latest positive figures will lead the Federal Reserve to take the punchbowl away by raising interest rates more than most analysts expected just a few weeks ago. In turn, that could further slow the housing market, dampen consumer spending and crimp corporate profits. "The two major concerns are the extent of slowdown in housing and how it can feed into growth and consumer spending," said Joshua Shapiro, chief United States economist at Maria Fiorini Ramirez Inc., a research firm in New York.

Many analysts, including Mr. Shapiro, believe a housing slowdown is already under way. Along with rising interest rates and anemic job growth, any such drop-off could sap the economy next year - by just how much is still subject to debate.

Americans have taken advantage of historically low mortgage rates to buy homes, refinance existing loans and borrow money for renovations or other household needs, all of which have been an important and substantial boost to spending, Mr. Shapiro said. While neither he nor others expect that activity to dry up, even a modest tapering off could knock growth down a peg or two. Mr. Shapiro, for one, says growth could drop from 3.5 percent in 2005 to 3.2 percent in 2006.

The average interest rate on a 30-year, fixed-rate mortgage was 6.28 percent last week, from a low of 5.53 percent in June, according to Freddie Mac, the housing-finance company.

The Commerce Department said today that new home sales jumped 13 percent in October, to an annual pace of 1.42 million, a record. But that contradicted earlier data that shows existing home sales slowing, construction activity easing, falling mortgage applications and declining confidence among home builders.

"I basically have a wait-and-see attitude with some healthy suspicion about this report," said David Seiders, chief economist at the National Association of Home Builders. "Either there is something that all of those other reports are not telling us, or this will get revised."

In another seemingly upbeat report, the Conference Board showed consumer confidence jumped 16 percent. Still, that is below the level before Hurricane Katrina tore up the Gulf Coast last summer. And the Commerce Department said orders for durable goods - big-ticket items that last more than three years - jumped 3.4 percent, but most of that increase was concentrated in military and commercial planes.

In addition to housing, the Federal Reserve and businesses will have a big part in setting the economy's pace next year - the Fed, through interest rates, and companies, by their hiring decisions.

There is great speculation about how much more the Fed, where Ben S. Bernanke is expected to replace Alan Greenspan as chairman in February, will raise its benchmark short term rate, now at 4 percent, before Mr. Greenspan leaves. And will Mr. Bernanke feel compelled to prove his inflation-fighting mettle by nudging them higher still? The question may seem like splitting hairs, especially when the debate is whether the rate is 4.5 percent or 4.75 percent, but it has certainly got investors' attention.

The recent rally in the bond market, which is considered a haven during periods of economic stress, indicates that many investors are betting that the Fed "is likely to overshoot in its tightening," Ethan Harris, chief United States economist at Lehman Brothers, wrote in a note to clients.

A harder question, and one that could greatly influence policy makers, is whether business will pick up any of the slack if consumers are no longer spending as much.

So far the evidence is inconclusive.

After adding an average of 202,000 jobs a month for the first seven months of the year, companies hit a slow patch late this summer. In August, businesses created just 148,000 jobs followed by a decline of 8,000 in September after Katrina. And just when economists expected a big bounce back in October, the Labor Department reported a net increase of just 56,000 jobs.

Analysts are eagerly awaiting the Labor Department's next jobs report, out Friday, and hoping the recent weakness will prove temporary. But they worry that new-job creation may turn out to be disappointing because of deep-rooted concerns about thinning profit margins, due to, among other things, high energy costs.

"This is only a fear that has sprung up recently," Mr. Shapiro said.

Economists expect 220,000 new jobs will be created, according to a survey by Bloomberg News.

Another hard-to-measure factor that could have a positive bearing on both businesses and consumers is rebuilding activity on the Gulf Coast and in parts of Florida. The reconstruction that accompanies major disasters have been known to have a greater economic impact than the initial series of negative aftershocks from tragedies.

Many analysts say a housing-led slowdown is likely to be delayed until the second half of 2006 because billions of dollars that the federal government and insurance companies are starting to pump into hurricane-affected regions will make up for softer consumer spending.

"That is going to push up production activity into the first half of the year," said Mike Fratantoni, an economist at the Mortgage Bankers Association, which expects 3.7 percent economic growth in 2006, up from 3.6 percent in 2005. "The second half of the year, we see somewhat of a drop off."