Informed Speculation

The 1st quarter has been going great guns, economically; how long can it last, with the high energy prices? That’s the question I have…nevertheless, housing and manufacturing activity showed big gains last month, and economists are expecting a big number:

Mr. Hoffman and other analysts believe that the economy grew at a 5 percent annual rate in the first quarter after an anemic 1.7 percent increase in the fourth quarter; the Commerce Department will release its first estimate of gross domestic product growth on Friday. The experts, however, forecast that the economy could slow dramatically in the coming months, with oil prices above $70 a barrel, gasoline inching closer to $3 a gallon and mortgage interest rates at 6.53 percent. Those added costs will sap consumers’ purchasing power and lower their ability to borrow for home purchases, said David Greenlaw, an economist at Morgan Stanley.

This puts the Fed in the unenviable position of trying to balance inflation fears with worries over a possible downturn from high energy prices and the pricking of the housing bubble:

Estimates on economic growth will play a critical role in shaping the actions of Federal Reserve policy makers, who have signaled that they will raise their benchmark short-term interest rates at least once more, to 5 percent from 4.75 percent, on May 10. The Fed has indicated further increases will be determined based on economic data.

Bond investors pushed the yield on the 10-year United States Treasury note to 5.098 percent, from 5.07 percent Tuesday evening, betting that the Fed will increase rates to 5.25 percent at its June meeting.

New home sales rose to an annual pace of 1.21 million in March, up from 1.07 million the month before and 1.2 million in January. Sales were strongest in the West, where they jumped 35.7 percent, and weakest in the Northeast, where they rose 4.7 percent.

But compared with last year the housing market has already weakened noticeably — sales were running at a pace of 1.31 million in March 2005 — and there are signs that sales and prices could lag further later this year. The median price — half the homes sold for more and half for less — slipped 2.2 percent from a year ago, to $224,200. And the number of homes on the market increased by 24.4 percent over the last 12 months, to 555,000; at the current sales pace it would take five and a half months to sell those properties.

Nevertheless, the economy, for now, has proven surprisingly resilient…