March 3, 1995 in Nation/World

Spending Spree Slows Despite Income Gains Sales Of New Homes Shoot Up 3.8% In Spite Of Higher Interest Rates

Associated Press
 
Tags:economy

New-home sales rose in January despite higher interest rates, while the incomes of Americans posted a solid advance that exceeded spending increases.

But analysts said the economy is slowing and there is little cause for financial markets to worry that overheating will generate inflation.

The Commerce Department said Thursday that sales of new homes rose 3.8 percent in January to a seasonally adjusted annual rate of 679,000, the highest level in three months.

“It’s fairly strong, but it’s off the peak,” said economist Cynthia Latta of DRI-McGraw Hill, a Lexington, Mass., forecasting firm. “The market has been held up by adjustable rate mortgages,” she said, and warmerthan-usual weather also has helped.

But she noted that another report this week showed existing-home sales dropped in January to their lowest level in nearly two years and housing starts also are down.

“We’re on a slowing growth track. One month’s data doesn’t change that,” she said.

“It’s kind of an erratic spike in the numbers. All the trends indicate there is a loss of momentum,” said Jim Irvine, president of the National Association of Home Builders.

Thirty-year, fixed-rate mortgages averaged 9.15 percent in January, up from less than 7 percent before the Federal Reserve began forcing up interest rates. They have fallen below 9 percent since then.

A jump from 7 percent to 9 percent would add $209 to the monthly payment on a $150,000 mortgage.

Stocks, bonds and the dollar all fell, partly in response to the economic news.

In another report, the Labor Department said the number of newly laid-off Americans filing claims for jobless benefits fell 13,000 to a seasonally adjusted 331,000 last week.

January’s 0.9 percent income gain was no surprise but is still the biggest increase in three months. It was more than twice the 0.4 percent increase in spending.

Analysts pointed to a drop of 1 percent in spending for big-ticket durable goods as a sign the economy is cooling, even though the durable-goods decline was more than offset by higher spending on services and non-durable goods such as food and fuel.

“The latest data on consumer spending points to a sharp slowdown in the first quarter,” said Bruce Steinberg of Merrill Lynch & Co. “February consumer spending will probably also be roughly flat.”

Consumer spending represents two-thirds of the nation’s economic activity and has been a key to robust growth. The government reported Wednesday that the economy surged 4.6 percent in the last three months of 1994.

The Federal Reserve, seeking to restrain growth and check inflation, has raised interest rates seven times in the past 13 months in an effort to slow the expansion rate to about 2.5 percent.

The new income figures were swelled by earnings for overtime and some special factors, including pay raises for federal workers and cost-of-living increases that drove up benefits.

The Commerce Department said that incomes climbed 0.7 percent in December, revised from an earlier estimate of up 0.8 percent. Spending increased 0.1 percent in December.

Disposable income - income after taxes - rose 0.7 percent in January after gaining 0.8 percent the previous month.

© Copyright 1995 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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