Industry builds its own rules
By now, the construction industry was supposed to be skidding down a rocky slope, its foundation eroded by rising interest rates. But economists consistently have guessed wrong about Americans’ strong proclivity to spend, especially on spanking new, elegant homes. Which means construction has held fast to its craggy promontory, near a 10-year peak. Another industry test, housing starts for May, is due Tuesday. Economist Sung Won Sohn looks for no gain, at 1.47 million units, annually. “We certainly can see evidence that housing has plateaued,” says Sohn, of Norwest Corp., Minneapolis. “Fundamentals remain strong, because of nice income gains and very strong consumer confidence,” he says. “But some of the housing industry’s gains have been borrowed from the future, amid concerns over higher interest rates.” Longer term, Sohn says, unfavorable demographics of young families argue against a big boom for home construction over the next several years.
Paltry price hikes?
Few economists are willing to give up the inflation watch, despite last week’s news that, for the first time in 45 years, prices at the wholesale level fell for five months in a row. Watch for Tuesday’s report on the May consumer price index to show a bit of upward bias, but nothing very worrisome, says economist Tim O’Neill. “We will see a rise of 0.2 to 0.3 percent for the month, with a similar gain for prices excluding food and energy,” he says. O’Neill, of Chicago’s Harris Bank and its parent, Bank of Montreal, says the benign inflation picture “adds to a perception that the economy has begun to slow, as consumers are scaling back spending. It adds fuel to the belief the Federal Reserve has no need to move interest rates” when policymakers gather July 1.
Predicting a labor squeeze
In advance of the meeting of the Federal Open Market Committee, which sets monetary policy, the Fed on Wednesday rolls out its beige book, which tells, region by region, how the economy is faring. Watch out for descriptions of excessive tightness in labor markets, which would indicate the Fed remains on alert to squeeze its short-term lending barometer, currently at 5.5 percent. Most analysts, however, think such a move won’t occur until later in the summer.
Spring gone from the dollar
The dollar’s strength against the Japanese yen has evaporated like a late spring puddle, dropping the greenback to an 8-month low. Don’t look for much of a rebound after Thursday’s report on the April trade deficit. Economists are looking for a return to a trendlike shortfall of $10.5 billion, after an unexpected drop to $8.5 billion in March. While the brighter picture benefited from lower oil prices and a boomlet in aircraft sales, analysts said there were few signs of any permanent improvement in the intractable trade gaps with Tokyo and Beijing. Other reports due out this week: May industrial production Tuesday and first-quarter labor productivity and costs, Wednesday.
Not quite at investor nirvana
With blue-chip stock market indicators up roughly 20 percent since the beginning of this year, there are inevitable whispers about investor euphoria. Northbrook market analyst Fred Gordon says, “If we were trying to spell the word, we would be at least to E-U-P-H.” But Gordon, who for many years wrote the Plain Talk Investor newsletter, says stocks “remain on track to hit 10000 by 2000. That is the market’s mantra, and it is looking more and more realistic.” On the other hand, he said he believes it would be no big shock if the Dow Jones industrial average were to rapidly tumble at least 500 points.
