While the economy operates at full throttle, with only scattered evidence of overheating, the euphoria of consumers shows signs of boiling over. With a crush at stores and auto dealerships, as well as developments of new homes, Americans are creating concerns about an optimistic extreme. Small wonder that Federal Reserve Chairman Alan Greenspan has been known to fume about “irrational exuberance.” For now, Chicago economist Diane Swonk expects Tuesday’s report on March consumer confidence to show a near-flat reading of 142, barely ahead of the 141.8 a month earlier. “Two forces are tugging at consumers–a very robust economy versus the Fed raising rates,” she said. At this point, said Swonk, of Bank One Corp., “consumer checkbooks are winning out, because Americans have quite a bit of money.” She said the Fed’s efforts so far “are a drop in the bucket. It will take more time to dampen the upbeat mood of American consumers.”
GROSS DOMESTIC PRODUCT
DEMAND STILL STRONG
Some analysts fear consumers are thumbing their noses at the Fed, which has engineered five increases in short-term interest rates since June. The effort to tighten credit is directed mainly at growth thought to have accelerated beyond the economy’s speed limit. Expect more talk about too-fast expansion with Thursday’s final revision of fourth-quarter gross domestic product. Economist Tim O’Neill is looking for the revision to show torrid expansion of a 7.2 percent annual rate, up from the 6.9 percent estimate a month ago. “But that’s almost ancient history,” said O’Neill, of Chicago’s Harris Bank and its parent, Bank of Montreal. “What’s important is that powerful domestic consumer demand still is running at a growth rate of 5.5 percent, barely below its average for last year.” He said the economy shows scant signs of slowing, with overall expansion currently running “north of 4 percent, and indicators all remaining near record levels.” His bottom line: “The key for the Fed is more interest rate hikes to come.”
HOUSING
FEBRUARY RESALES
Economists are divided about whether a slight setback for the real estate industry over the last three months is meaningful. Watch for Monday’s report on February existing-home resales to shed additional light on the situation. Worth noting: Will there be a second drop for resales, which dipped an unexpected 10.7 percent in January?
WALL STREET
VOLATILITY CONTINUES
The stock market has been searching for direction, with most of the money still being funneled into the so-called new economy, where company valuations have reached extremes that could end in a heart-stopping stumble. Accordingly, some investors have looked at old-economy shares as a refuge, even though they hit a severe rough patch barely two weeks ago. Chicago investment manager Marshall Front said Americans “are always fighting the last war,” and must be wary of following the old rules. Front, of Front Barnett Associates, is telling clients, “with no recession in sight, and the peak in long-term interest rates for this cycle already behind us, we believe the investment outlook remains favorable for both bond and stock investors, albeit within a continued volatile environment.”
