Inflation Worries Rekindled By Latest Data Home Sales, Personal Income, Consumer Spending All Take Jump

The highest level of new home sales in more than 10 years and solid gains in personal income and consumer spending rekindled concerns the economy may not be slowing enough to avoid an interest rate increase.

“This is an economy that is not spontaneously rolling over and which will need an interest rate restraint going into 1997,” contended Stephen S. Roach, chief economist for Morgan Stanley & Co. in New York.

Federal Reserve policy-makers decided last week against raising short-term interest rates to head off a new round of inflation, apparently believing the economy would slow sufficiently on its own. They meet again Nov. 13.

Bond prices faded Monday, but stocks rose on speculation of robust third-quarter earnings.

Despite high mortgage rates, sales of new single-family homes jumped 4.7 percent in August to a seasonally adjusted annual rate of 832,000, highest since an 857,000 pace in April 1986, the Commerce Department said Monday.

Analysts had expected a 4 percent decline. The department also revised the July increase to 8.3 percent, even stronger than its initial 7.9 percent estimate.

“These data suggest that relatively high interest rates are doing little, if anything, to hamper the recent strength in the resilient housing sector,” said economist Marilyn Schaja of Donaldson, Lufkin & Jenrette Securities Corp.

“While it is true that the surge in new home sales over the past two months has been largely due to a 47 percent increase in the Midwest region, sales in general are at an extremely high annual rate,” she added.

Indeed, sales have topped the 700,000 rate for the last eight months, the first such string of advances since late 1985 and early 1986. As a result, they are 15 percent above those of the same period of 1995. They totaled just 667,000 in all of 1995.

In a separate report, the department said personal income and consumer spending both rose 0.6 percent in August after edging up in July just 0.1 percent and 0.2 percent, respectively.

“The consumer is well supported by solid income generation,” Roach contended.

Consumer spending accounts for two-thirds of the nation’s economic activity. It rose at a 3.4 percent annual rate in the April-June quarter, helping boost economic growth by a 4.7 percent rate.

Some analysts were not impressed, however. Economist Bruce Steinberg of Merrill Lynch & Co. noted that, when adjusted for inflation, spending rose 0.5 percent in August after falling 0.6 percent in June and remaining unchanged in July.

“Despite the August increase, real consumer spending probably edged up at a feeble 1 percent rate for the third quarter,” he said. “That implies that third-quarter GDP probably rose at a 1.5 percent to 2 percent rate, far slower than earlier this year.”

The GDP is the gross domestic product, the total output of goods and services within the United States.

Spending totaled $5.17 trillion at a seasonally adjusted annual rate, up from $5.14 trillion in July. The 0.6 percent gain, largest since an 0.8 percent gain in May, was in line with analysts’ expectations.

Spending on durable goods, meant to last more than three years, rose 3.1 percent, steepest since a 5.6 percent advance last February and erasing a 1.1 percent decline the previous month. Motor vehicle purchases accounted for most of the increase.

Spending on nondurable goods such as food and fuel was unchanged after inching up 0.2 percent in July. Spending on services rose 0.3 percent following July’s 0.5 percent gain.

Personal incomes totaled $6.5 trillion, up from $6.47 trillion in July, when they rose just 0.1 percent. Incomes had shot up 0.9 percent in June. Analysts had predicted a 0.5 percent advance in August.

Private wages and salaries, the most closely watched component of income, jumped $29.7 billion to $3.67 trillion after falling $6.1 billion in July. Employment, average weekly hours and average hourly earnings all increased.