The Economy Is Fine

Despite a few weaker-than-expected numbers, economic growth continues

By Joseph Lisanti

First-quarter gross domestic product was revised upward to 4.4% from the 4.2% reported earlier. And existing home sales in April rose 2.5% to a seasonally-adjusted annual rate of 6.64 million, slightly off the record 6.68 million set in September 2003.

Although existing home sales were solid, new home sales for the month plunged 11.8% to 1.09 million from the March record of 1.24 million. Also lower were orders for durable goods, which fell 2.9% in April.

David Wyss, Standard & Poor's chief economist, is not concerned about the weaker-than-expected new home sales and durable goods orders. He notes that while April durable goods orders declined, the March figure was revised upward to a gain of 5.7% from the previously reported 3.4% advance.

As for the slide in new home sales in April, Wyss says, "the March number was so high as to be almost incredible, and the level remains up 6.4% from a year ago."

To add to the economic data confusion, consumer sentiment plunged to a seven-month low, while a separate survey of consumer confidence rose. None of this is likely to deter the Fed from an expected increase in the fed funds rate at its meeting June 29 and 30.

In our opinion, some of the weakness in stocks seen earlier this month has stemmed from a fear that the Fed would tighten quickly as it did in 1994. We don't think that will happen, and the rebound in share prices in late May suggests that investors are coming around to our point of view.

The Fed appears likely to raise short-term rates gradually over the next 18 to 24 months. Wyss forecasts that the total increase will be 300 basis points (three percentage points), enough to cool any incipient inflation worries, but not enough to crush the recovery.

We continue to believe that common stocks are the best place for the bulk of investment assets in the months ahead.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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