WASHINGTON - Analyst are sticking with their view that the economy is continuing to turn in a solid performance despite government reports yesterday that showed a drop in new home sales and a decline in consumer spending in April.
"Clearly we're still growing at a nice clip," said Paul McCulley, chief economist of UBS Securities. "The economy is cruising now rather than accelerating."
The Commerce Department reported that new single-family home sales fell 6.8% in April to a seasonally adjusted annual rate of 683,000. In a separate report, the department said household spending slipped 0.1% in April. Both indicators were down for the first time in three months.
In addition, the Conference Board reported that its index of consumer confidence fell to 87.6 in May from 92.1 in April, which was its first drop in three months as well. The group's survey of 5,000 households found that consumers were less optimistic about both current conditions and the future.
The economy grew by a 3% annual rate in the first quarter, according to the government's revised estimate released last week. Yesterday's reports came in weaker than expected, but not by much. Analysts said that the indicators fell from relatively high levels in the preceding months.
Consequently, economists said they were not inclined to change their second-quarter growth forecasts that run in the neighborhood of 4%.
"As a whole, these numbers are on the soft side," said Stuart Hoffman, chief economist of PNC Bank Corp. in Pittsburgh. But "I don't want to say the quarter is off to a slow start; I'd say it is more like a medium start."
The April home sales rate slipped from 733,000 in March, which was 22% higher than the previous March. The 0.1% decline in personal spending in April followed a revised 0.7% advance in March, previously reported up just 0.4%. The May consumer confidence reading is down from a four-year high set in April.
Still, analysts agreed that higher mortgage rates are beginning to take their toll on the housing market. In April, 30-year fixed-rate mortgages averaged just over 8.3%, compared to just under 7.7% in March, according to Mark Obrinsky, a senior economist at the Federal National Mortgage Association.
Obrinsky said that there is a tug-of-war going on now between higher rates working to keep people out of the housing market and improved employment prospects working to keep people in the housing market.
Obrinsky is optimistic that home sales can improve at least for the next few months, even though he does not see rates dropping any time soon. "If mortgage rates don't rise too much from here, we're looking at the possibility of higher sales rates in May, June, and July," he said.
However, David Seiders, chief economist of the National Association of Home Builders, said his group's monthly survey of builders indicates that home sales will drop further in May because of higher rates and less reported traffic from potential buyers visiting new units.
"It seems to be an interest rate story," Seiders said, noting that mortgage rates averaged about 8.6% in May.
Economists predicted that consumer confidence will remain strong thanks primarily to an improving labor market.
"Although confidence retreated in May, the current reading continues to be at a fairly reassuring level," said Fabian Linden, an executive director of the Conference Board. "Regarding employment, there has been a slight improvement in expectations," the group said in its report.
The Commerce Department also reported yesterday that personal income grew 0.4% in April, following a 0.6% gian in March. The department noted that higher-income families paid about $30 billion more in federal taxes in April on an annualized basis.