WASHINGTON - The U.S. economy flexed its muscles last week as a number of reports proved beyond a shadow of a doubt that 1993 will end with a boom.
Statistics on retail sales, manufacturing, and housing displayed impressive bravado and supported the notion that the interest rate sensitive sectors of the economy are finally benefiting from the low level of rates.
The Treasury market largely ignored the news, already convinced that the great bond market rally of 1993 is over and that interest rates are poised to move higher in coming months.
"The market has priced in stronger growth, and the newest reports are merely confirming that growth," said Matthew Alexy, senior market strategist at CS First Boston Corp. "The numbers aren't telling us anything new."
Alexy and other market observers agreed that the housing sector will be the best barometer of the economy's future health. As market analysts sit down this week to construct their final economic forecasts for 1994, many are scrutinizing housing statistics to see if demand will march into the new year or fall by the wayside.
Much of the economy's acceleration in the latter part of 1993 reflected stepped-up consumer spending on household items, including furniture and other durable goods. Economists are quick to point out that better durable goods sales in 1993 were directly related to the low level of interest rates and the recovery in the housing sector.
But as 1994 approaches, the question is whether higher interest rates and concerns about the economy will hamper the housing sector's performance.
A report released Friday suggested that demand for housing continues apace. The Commerce Department reported Friday that housing starts rose 4% in November to a seasonally adjusted annual rate of 1.432 units, their highest level since January 1990.
But a survey released last week paints a less optimistic picture of the housing sector. The National Association of Home Builders' monthly survey found in December that 62% of builders expect "good" sales of single-family homes during the next six months, down from 72% in November.
The survey also showed that the number of builders who expect "poor" sales during the next six months was little changed at 6% in December from 7% in November. The number of builders who expect "fair" sales rose to 32% from 21%.
Traffic of prospective buyers in December was rated as "high to very high" by 48.2% of the builders surveyed, down from 48.7% in November. The number of builders rating buyer traffic as "low to very low" was at 23.0% in December, according to the survey.
The survey's results parallel expectations that the economy will perform well next year and that long-term interest rates will edge higher. Judging from Friday's housing starts report, Treasury market analysts can detect no slowdown in demand yet. And into 1994, the outlook remains uncertain.
"The numbers were further confirmation for the bond market that we're going to have a really robust fourth quarter," said Mary Dennis, an economist at Merrill Lynch Government Securities Inc. "Beyond that it's anyone's guess."
The risk to the Treasury market is that continued improvement in the housing sector may prompt Wall Street firms to raise their already upwardly revised forecasts for growth next year. The market has priced in stronger growth in coming months, but players fear that the economy's ongoing acceleration will carry over into next year.
"The concern is that stronger growth in the economy and better home sales will boost inflation," said First Boston's Alexy. "Housing is definitely going to play a big role in whether or not that fear is realized."
The Treasury market shrugged off strong news on the economy Friday and moved to slightly higher levels with the help of municipal defeasance.
The 30-year bond ended up 6/32 to yield 6.27%.
Muni defeasance gave the market a much-needed boost following news of another solid increase in housing starts. State and local governments have been decent buyers of Treasuries in recent months, and that trend has continued well into the fourth quarter of the year.
In futures, the March bond contract ended up 1/32 to 119.10.
In the cash markets, the 4 1/4% two-year note was quoted late Friday up 1/32 at 100.04-100.05 to yield 4.16%. The 5 1/8% five-year note ended Up 4/32 at 99.27-99.29 to yield 5.14%. The 5 3/4% 10-year note was up 6/32 at 99.23-99.27 to yield 5.77%, and the 6 1/4% 30-year bond was up 6/32 at 99.16-99.20 to yield 6.27%.
The three-month Treasury bill was up one basis point at 3.04%. The six-month bill was unchanged at 3.23%, and the year bill was down one basis point at 3.45%.