The Economy Express Still Slowing

Two economic reports released Monday reveal further evidence that Federal Reserve interest rate hikes has U.S. economic growth slowing to a more sustainable pace after growing several years at a blistering speed.

Sales of new homes fell in October by 2.6 percent, to an annualized rate of 928,000, data from the Commerce Department released Monday showed.

Even with the decline, new-home prices reached record levels in October, a sign of the healthy housing market. Some analysts were expecting new-home sales to fall 4.9 percent.

A survey of economists by CBS.MarketWatch.com had looked for a slower pace of new single-family home construction, at a 909,000 rate.

In a second report released simultaneously with the new-home sales figures, The Conference Board said its Composite Index of Leading Economic Indicators fell 0.2 percent to 105.5 in October after registering no change in September and dropping 0.1 percent in August.

October's fall was slightly more than the 0.1 percent analysts had anticipated.

The index is watched closely because it gives an indication where the overall U.S. economy is headed in the next three to six months.

A related index, which measures current or coincident economic activity, fell 0.1 percent in October the first decline in 13 months, the New York-based business group said.

Ken Goldstein, the board's chief economist, noted that since the start of 2000, the leading indicators have declined in five months and been flat in four.

"To be sure, this series has been signaling and continues to point toward a cooling of still-strong economic conditions," Goldstein said in a statement accompanying the report. "Interest rates and growth restraints continue to dictate the pace and timing of how much slower the economy will be this winter."

The two reports fueled arguments for Fed Chairman Alan Greenspan to initiate an interest-rate cut, probably sometime next year, said economists.

The Federal Reserve has boosted short-term interest rates six times since June 1999 to slow the economy's growth enough to keep inflation in check, but not so much that it triggers a recession. The Fed's rate increases are designed to raise borrowing costs and dampen demand for big-ticket items such as homes and cars. Many call this an attempt to reach a "soft landing" for the high-flying economy.

The Fed's rate increases are working to slow economic growth, which clocked in at a 2.4 percent rate in the third quarter, and that has reduced pressure on long-term interest rates.

The average rate on a fixed-rate 30-year mortgage was 7.8 percent in October, down slightly from the average 7.9 percent rates posted in September and in October 1999.

With mortgage rates holding steady below the 8 percent mark, home builders say they feel good about future sales. Last week, the government reported that construction spending nationwide jumped 0.9 percent in October, its second highest leveon record.

"The housing market continues to ignore the larger economy's slowdown," remarked economist Dan Green of The Dismal Scientist.

"What matters is that sales are clearly trending higher: in the three months to October, new home sales rose at a 21-percent pace compared to the previous three months," noted Ian Shepherdson, chief U.S. economist with High Frequency Economics. "The housing rebound will ensure construction sector strength in (the first half) of 2001. No recession here."

With home sales at solid levels, home prices rose to all-time monthly highs in October.

The median sales price, the midpoint where half the homes sold for more and half for less, increased 2.9 percent to a record $174,900 in October.

The average price of a new home sold in October rose to a record $218,400, up 6.9 percent from September's average of $204,300.

Sales fell in every region except the Northeast where they rose.

Sales declined by 8.9 percent in the West to a seasonally adjusted annual rate of 256,000. They fell by 8.2 percent in the Midwest to a rate of 156,000 and they dropped by 2.8 percent in the South to 421,000. But in the Northeast they rose a whopping 37.7 percent to a rate of 95,000.

Housing activity, an engine of the robust economy, is expected to moderate this year but still be at robust levels.

A key report on the current employment situation is due from the Labor Department on Friday.

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