Greenspan has no intention of boosting interest rates until steady rise in inflation.
When buyers contemplate housing, they inevitably picture plump, steady price appreciation. Year after year, home values are on a long upward march, at times leaping by double digits.
But what would happen if such galloping prices were to slow? Some analysts have declared that real estate is approaching a “bubble,” and that its bursting may occur sooner, not later.
A fresh look at the industry comes Wednesday, with housing starts for January. Economist Sung Won Sohn is looking for a decline, to 1.995 million units annually from 2.088 million in December.
“The bloom is off the rose for the housing industry, even though construction will remain quite strong for the remainder of this year,” said Sohn, of Wells Fargo & Co. in Minneapolis.
One reason that gains in house prices appear to be slowing, he said, is that “mortgage rates have inched higher, and people who were sitting on the fence have already jumped in” to buy a home.
Helping to boost prices, Sohn said, is the fact that more workers find themselves staying put in their jobs and putting down roots. That’s because a general absence of hiring has made it less attractive to jump to a new position.
What was seen as a compliant attitude by Federal Reserve Chairman Alan Greenspan toward a weakening dollar and the danger of inflation sent investors scrambling last week.
The central bank chief’s remarks about the course of monetary policy made it clear that he has no intention of boosting interest rates until he sees clear evidence of rising price pressures.
That means reports Thursday and Friday, on the January producer price index and consumer price index, will be nonevents.
Economist Ian Shepherdson says “unless there is a sudden uptick in inflation – which seems very unlikely indeed -Mr. Greenspan is not going to raise rates.”
Shepherdson, of High Frequency Economics, in Valhalla, N.Y., says the Fed chief is waiting for evidence that “a clear, strong trend in payroll growth has emerged, no matter how strong the data for gross domestic product.”
Other reports due out include January industrial production and capacity utilization Tuesday and leading economic indicators Thursday.
Keep an eye on the factory report. When last measured, the goods-producing sector was operating at barely more than a 75 percent rate. With so much overcapacity, executives remain wary of building new manufacturing facilities.
With fourth-quarter corporate profit reports largely out of the way, the stock market is in a lull until companies start making estimates for the current period. That could mean three weeks of directionless trading.
Economist Jill Thompson says profits have rebounded dramatically, “besting their previous peak by 25 percent.” Thompson, of FleetBoston Financial, says businesses created the profit boom “initially by sharp cuts in investment and inventories, then sharp cuts in jobs, which generated stunning increases in productivity.”
She said the next step for corporations is to step up investment in new equipment and to further rebuild stocks of unsold goods.
Meanwhile, stock, bond, commodity, futures and options markets will be closed Monday for Presidents’ Day.
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AP-NY-02-13-04 1840EST
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