CHICAGO – The economy’s flipflops are often difficult to track, even from month to month. Take the torrid start to 2006, paced by through-the-roof retail sales and rapid construction of housing. The flurry of activity in January prompted warnings that the economy could soon overheat. And reports of a 5 percent-plus growth rate stirred expectations that the Federal Reserve would be forced to raise interest rates until midyear or beyond.
The news for February, however, has been less robust. Housing has cooled, the weather was less friendly and consumers put a tight rein on their wallets. Car sales tumbled.
That brings us to today’s report of last month’s leading economic indicators. Economist Brian Wesbury is looking for a drop of 0.5 percent, following January’s outsized gain of 1.1 percent.
“Only three components fell out of the 10 indicators, but that was enough to push the indicators lower,” said Wesbury, of First Trust Advisors in Lisle, Ill. For now, he sees scant evidence that the economy will slow.
“There was a soft patch in the leading indicators last fall, but it proved to be a false signal,” he said. “There is not much to worry about, because the first quarter will be quite solid.”
Looking ahead, Wesbury expects the Fed to raise its short-term rate barometer by a quarter-point, to 4.75 percent next week. He anticipates another hike to a flat 5 percent before summer.
“That rate shouldn’t be high enough to hurt the economy, because the rate averaged 5.4 percent in the late “90s, which was a boom time,” Wesbury added.
One of this week’s most carefully monitored reports will be Friday’s look at February orders for durable goods. Economists are expecting a rebound of about 2.8 percent, following a plunge of 9.9 percent a month earlier. All the blame for the shortfall was placed on aircraft orders, as Chicago-based Boeing Co. suffered a drought in activity following a year-end flurry of commitments in its battle to stay ahead of European rival Airbus SAS.
Also due Friday: February new home sales. Analysts who fret about the possibility of a real estate crash have been warning that construction continues to go full-tilt, but foot traffic at sales centers is in need of a spring warm-up.
The stock market has been bumping up against five-year highs, with some price measures setting new records. But nervousness persists over first-quarter corporate profits, which roll out in about three weeks. For now, companies are involved in confession season, owning up to any expected shortfalls.
When earnings reports appear, they will be up by 10 or 11 percent, better than the 8 percent gains expected a few weeks ago, says Chicago investment manager Marshall Front of Front Barnett Associates.
In the meantime, he says, “watch for some twists and turns in corporate results, even though the economy is performing better than expected, with very little inflation.”
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