New-Home Sales Rose in April As Capital-Goods Orders Fell; Data Defy Expectations, But Longer-Term Trends Line Up With Fed Outlook
The latest readings on U.S. housing and business investment confounded economists' expectations, but the underlying trends still show the economy acting pretty much as Federal Reserve officials had hoped: Perhaps slowing, but not sinking.</br></br>In two separate reports, the Commerce Department said new-home sales rose and businesses' orders for capital goods dropped in April. At first glance, that's at odds with the Fed's main scenario for what the economy will do this year: Consumer spending should slow as a weakening housing market makes people feel poorer, but increased business investment -- in the form of capital-goods purchases and hiring -- should help keep the deceleration from becoming a disaster.</br></br>Economists, however, warned against reading too much into the volatile monthly data, saying that longer-term trends still point toward slowing home sales and growing capital spending. "We all agree that the housing market is cooling off, and some other sector of the economy must take the burden of keeping growth healthy," said Ethan Harris, chief U.S. economist at Lehman Brothers in New York. "Capital spending is a prime candidate."</br></br>New-home sales rose to a seasonally adjusted annual rate of 1.19 million in April, up 4.9% from the previous month, thanks in part to a surge in Southern states. The number contrasted sharply with expectations of an April drop in home sales, but downward revisions to the previous months' numbers lessened the surprise. After revisions, the rate of new-home sales dropped 7.6% over the first three months of 2006, compared with a previous estimate of 4.2%. April's rate of sales was still 12.4% below the most recent peak in July 2005.</br></br>"The overall picture is one of a cooling housing market," said Joshua Shapiro, chief U.S. economist at MFR Inc. a New York consultancy. "It's hard to argue against that." Declining demand, for example, was among the reasons cited by luxury-home builder Toll Brothers Inc. when it announced earlier this week that it was lowering its full-year earnings forecast.