Growth Forecasts Are Pared Back After Fed Hikes
THE brakes applied by the Federal Reserve Board are working - there are now early signs that some parts of the United States economy are starting to slow.
The first signs of the moderating growth are in the interest- rate-sensitive housing sector. New mortgage applications last month fell to their lowest level of the year. Developers report that traffic in model houses is down. And, refinancing of new houses has slowed to a crawl.
Economists are not surprised to see housing slowing down. ``Housing is where the slowing first shows up - it's a long leading indicator of the economy,'' says Robert Dederick, chief economist for Chicago-based Northern Trust Company.
Anticipating a more modest pace, economists have started to pare back their growth forecasts. For example, the 52 economists polled by the Blue Chip Consensus, published by Eggert Economic Enterprises Inc. in Sedona, Ariz., dropped their May forecast for the year to a 3.6 percent annual growth rate from April's forecast of 3.7 percent.
And, it is possible the forecasts will shrink some more. ``There is no doubt that this latest move by the Fed will have a restrictive effect on economic growth,'' says Gary Shoesmith, director of the Center for Economic and Banking Studies at Wake Forest University's Babcock Graduate School of Management in Winston-Salem, N.C.
``It takes only one month to change from expansion to recession,'' cautions Leonard Lempert, director of Statistical Indicator Associates, North Egremont, Mass.
Last Tuesday, the Federal Reserve Board raised interest rates by 1/2 of 1 percent. Most of the nation's banks immediately raised their prime lending rate by a similar amount.
The Fed's move last week was greeted favorably by the bond market, where long-term interest rates fell late in the week. ``This latest move has allayed fears of an increase in inflation,'' Mr. Shoesmith says.
Home builders are hoping that Wall Street's optimism and lower long-term rates are reflected on Main Street.
Two months ago, Harold W. Smith Co. in Walnut Creek, Calif., was getting 60 to 70 families a weekend at its model homes. Now Smith is down to 15 families a weekend. ``It is a little unnerving,'' says Randy Smith, a partner of the custom home company.
The higher mortgage rates have combined with inflating housing costs to give buyers a form of ``sticker shock.'' Rick Porter, president of Richport Properties in Tucker, Ga., says, ``Those 7 percent mortgages created unrealistic expectations.'' As a result, he says, buyers have had to scale back their purchases to reflect 8 1/2 percent mortgages. This means fewer recreation rooms, for example.
The biggest impact is on low- and moderate-income families. ``Some first- time buyers are priced out of the market. They can't afford the payments on the higher rates,'' says David Lereah, chief economist for the Mortgage Bankers Association in Washington. With long term mortgage rates up about 1.5 percentage points since the Fed started tightening in February, the monthly mortgage payment on a $100,000 home has gone up by about $100 a month.
The slowdown may have also spread to the retail sector, which is dependent on the amount of discretionary income in consumers' pockets.
The Johnson Redbook Service, which tracks retail indicators, reports that the growth rate of seasonally adjusted chain and department store sales in May was lower than April's growth rate. However, the service says there could be a variety of reasons for the slowdown, ranging from colder weather to a slowdown in consumer spending. Consumer confidence levels have remained high.
Some companies have been able to use the rising interest rates as a sales tool. ``We let our customers know that a rate is good for 30 days otherwise we will have to pass on a rate increase,'' says Alan Swimmer, the president of Essex Credit Corporation, a yacht finance company in Essex, Conn. The sales tactic is effective.
``Buyers are pushing to close on their purchases fairly quickly so as not to get stuck with an interest rate increase,'' Mr. Swimmer explains.
The rising rates have also not adversely impacted auto sales since the car companies have found ways to insulate buyers from interest rate hikes. ``There is enough competitive pressure that manufacturers must absorb any increase in costs, including interest rate increases, themselves,'' says Susan Jacobs, president of Jacobs & Associates, a research firm in Rutherford, N.J.
The appliance industry is also absorbing the rate hikes. Although 75 percent of all appliances are purchased on credit, sellers have been marketing the machines with zero financing charges. As a result, the industry is still expecting to sell 50 million units, its biggest year since 1987.
And, there is little sign that the manufacturing sector has been deterred by the Fed's action. With inventories low, manufacturers are confident they will continue to get new orders.
This is the case at Taylor Machine Works in Louisville, Miss., where the manufacturer of heavy-duty forklifts is in the process of expanding its capacity. ``Business is still good,'' reports Lex Taylor, the president of the company.
Mr. Taylor, however, is watching the rate moves carefully, since he has found volatile interest rates will eventually have an adverse effect on his business.
``If the rates are coming down, people wait to see if they can get the best deal, and if rates are going up, people don't buy at all,'' he explains.
Instead, Taylor says he would like to see a period of stability in the rates ``even if they are high.''