The long-awaited cooling of the red-hot U.S. economy may have finally begun, according to a number of economists poring over an array of recent soft economic figures.
''I sense clear signs of the beginning of the desired slowdown,'' said Mickey Levy, chief economist at Bank of America in New York. ''In particular, we've had two months in a row of flat retail sales,'' and a combination of falling auto sales and weak chain store sales ''means a weak retail sales number for May as well.''
Many economists, investors and policymakers are welcoming such signs because a more modest rate of economic growth would ease inflation fears and limit interest rate increases by the Federal Reserve in coming months. The bond and stock markets have rallied in recent days as the numbers have prompted a shift in expectations.
Among the signs: Sales of domestically produced new cars and light trucks, which include sport utility vehicles, are still relatively strong, but they've been declining since they peaked in February at an annual rate of 16 million vehicles. They fell in March to a 14.9 million rate, to 14.8 million in April and to about a 14.5 million rate last month, according to preliminary May numbers that became available Thursday.
Consumer spending for new vehicles and a host of other products and services has been a driving force in the now nine-year-old U.S. economic expansion, the longest in American history. In the first three months of this year, consumers increased their purchases at an inflation-adjusted annual rate of 7.5 percent, but so far it looks as if the figure for the current quarter will be only about half that large, analysts said.
One explanation is that the six interest rate increases by the Fed over the past year -- raising the central bank's target for overnight interest rates by 1.75 percentage points to 6.50 percent -- have begun to bite. The Fed is raising the cost of borrowing to induce consumers and businesses to moderate their spending, which would slow economic growth and avoid an acceleration of inflation.
The Fed last raised rates by a half-percentage point on May 16, a move fully anticipated by investors who were upset that the earlier increases seemed to have had so little impact on the headstrong economy. Now talk of another half-point increase at the next Fed policymaking meeting June 27-28 has all but disappeared, and some analysts who were expecting a further quarter-point rate increase are now suggesting there might be no move at all this month.
Such talk has cheered investors. The Dow Jones industrial average rose 3.4 percent this week, including a 1.23 percent gain Thursday, with the index up more than 350 points since last Friday to 10,652.20.
The tech-heavy Nasdaq composite index jumped 5.34 percent Thursday to close at 3,582.50. That was an 11.8 percent gain in the three trading days since last Friday.
At the same time, yields on U.S. Treasury securities have tumbled. Since May 19, yields on two-, five- and 10-year notes and on 30-year bonds have all dropped more than a quarter percentage point.
The Fed's rate increases since last June have been matched point for point by increases in banks' prime lending rates, raising borrowing costs for most households and smaller businesses. At the same time, larger firms are also paying more when they borrow from banks or raise funds in the money market, such as by issuing bonds.
Meanwhile, rates for both adjustable-rate and 30-year fixed-rate home mortgages have jumped sharply in recent weeks, the key reason that sales of both new and existing homes dropped noticeably in April, analysts said. However, in that case, March sales were very strong, so it's hard to be sure just whether the April decline is a harbinger of things to come or just a normal dip following a very strong month
''There seems to be plenty of evidence there is some slowing,'' said Ray Stone of Stone & McCarthy, a financial markets research firm. ''It is encouraging but not compelling. Maybe the interest rate increases are beginning to have some impact.''
Stone is sticking with his firm's forecast of an increase in the nation's gross domestic product at about a 4.5 percent rate this quarter after adjustment for inflation. That would be down from the first quarter's 5.4 percent rate and well below the 7.3 percent rate of the final three months of 1999.
But Stone agreed that ''most measures of economic activity, compared to the first quarter, seem lower. ... There is nothing to say we are falling out of bed, but there seem to be a lot of collaborative statistics pointing to a slowing. What is unfolding is on the weaker side of my expectations.'' If additional numbers coming in are also soft, he said, he likely would revise his forecast downward.
Stone noted that one of the largest changes between the first and second quarters is in construction. Thursday, the Commerce Department reported that the value of construction put in place in April was down about 1 percent from March. All the decline came in construction of new residential housing.
''We had an enormous gain in construction in first quarter, up at a 19 percent rate. Now the second quarter looks flat,'' Stone said. Some of the surge in building earlier in the year may have been due to unusually mild winter weather that allowed more outside construction than normal.
Another unexpectedly weak number was that reported last Friday for new orders for durable goods that were received in April. Orders for such items as new vehicles, computers and industrial machinery fell 6.4 percent, back to roughly the level of last November. That decline was reflected in a report Thursday by the National Association of Purchasing Management that also indicated, unexpectedly, that the manufacturing sector was still growing last month but more slowly than in April.
At Macroeconomic Advisers, a St. Louis forecasting firm, economist Joel Prakken said he isn't surprised by the soft incoming data because that's pretty much what his firm has been predicting.
Like Stone, Prakken said, ''We still have a pretty strong number for the second quarter, 4.5 percent, but it drops under 3 percent by the end of year.'' Part of the strength for the current three-month period is expected to be due to businesses building up their stocks of unsold goods at a much more rapid pace than in the first quarter, with part of that buildup due to a softening of sales.
The key to the forecast, Prakken said, is the large decline in the value of stocks in recent months -- the rally of the last few days notwithstanding. The broadest stock index, the Wilshire 5000, already has declined as much as the forecast expected for the entire year. The loss of investor wealth due to that decline is causing consumers to spend less than they otherwise would, trimming economic growth, he said.
By the third quarter, growth should taper off to a 3.1 percent rate and then to a 2.4 percent rate in final three months of the year, he said. At year's end, the jobless rate will be about where it was in April, 3.9 percent.
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