What's What

Home Sales, Spending Cool; Prices Rise: U.S. Economy Preview

June 25 (Bloomberg) -- Inflation pressures are mounting in the U.S. even as the housing market and consumer spending cool, reports this week are forecast to show, increasing the odds the Federal Reserve will keep raising rates beyond this month.

Combined purchases of new and previously owned homes fell to an annual rate of 7.77 million in May, according to the median forecasts of economists surveyed by Bloomberg News. If that pace is sustained, this year still would be the third-best on record for home sales.

Fed policy makers will raise their target interest rate by a quarter point to 5.25 percent following their two-day meeting June 28-29, the economists say. A day later, a report is expected to show consumer spending in May rose at the slowest pace in three months and price increases accelerated, suggesting this week's rate increase won't be the central bank's last.

``The data are going to show a further softening on the growth front, but at still-reasonable levels,'' said John Shin, an economist at Lehman Brothers Inc. in New York. ``They will also show more inflation pressures, and that means there are going to be continued rate hikes after June.''

Sales of new homes fell to an annual rate of 1.15 million last month from 1.198 million in April, economists project a report tomorrow from the Commerce Department will show. A day later, the National Association of Realtors is expected to report existing homes sold at a 6.62 million pace, down from April's 6.76 million rate.

If sustained over 12 months, the combined sales pace last month would be the third-highest on record after 8.35 million in 2005 and 7.98 million the previous year.

Incomes, Spending

Consumers bought 0.4 percent more goods and services in May than in the previous month, the smallest gain since February, according to the survey median ahead of a June 30 report from the Commerce Department. Incomes rose 0.2 percent, the smallest increase since November, the report is also expected to show.

Traders and investors will also focus on the Commerce report's core price measure, which excludes food and energy costs, for clue's on the likely direction of Fed policy in coming months.

Fed Chairman Ben S. Bernanke this month called recent increases in core prices ``unwelcome developments'' and said central bankers ``will be vigilant'' to ensure inflation doesn't become entrenched. He highlighted the three- and six-month trends in the core consumer price index and in the Commerce Department's core price index, the Fed's preferred price measure.

Economists estimate core prices rose 0.2 percent last month, matching the April increase, according to the survey median. Such an increase would put the three-month annualized rate at 2.9 percent and the six-month pace at 2.2 percent, according to Bloomberg News calculations. Bernanke says a rate of 1 percent to 2 percent is acceptable.

`Not Satisfied'

``The Fed will not be satisfied to keep rates on hold absent clear signs that growth is slowing to a pace that would ease inflationary pressures,'' Dean Maki, chief U.S. economist at Barclays Capital in New York, said in a June 22 note to clients.

Signs inflation is accelerating while growth is holding up will prompt the Fed to raise its target rate to 6 percent by the end of the year, Maki said, half a percentage point higher than he previously forecast.

Part of the reason the economy will not buckle is that consumer confidence is stabilizing as the price of gasoline plateaus, economists said. The average price of a gallon of regular gasoline at the pump was $2.88 over the first three weeks of June, down a cent from May's average, according to figures from the American Automobile Association.

Consumer Confidence

The New York-based Conference Board's index of consumer confidence rose to 103.8 this month, up from the 103.2 reading in May, according to the survey median. The measure slumped to 85.2 in October, a two-year low, after hurricanes devastated the Gulf Coast. The private research group's report is due June 27.

The University of Michigan's final report on June consumer sentiment, due June 30, is expected to confirm confidence is holding up. The measure is forecast to rise to 82.5 from May's seven-month low of 79.1. It would be little changed from the 82.4 preliminary reading issued earlier this month.

In other reports this week:

The economy probably grew at an annual rate of 5.6 percent in the first quarter, the most in more than two years, the Commerce Department's final revision on June 29 is expected to show. The preliminary report issued last month showed a growth rate of 5.3 percent.

First-time claims for unemployment benefits in the week ended yesterday rose to 310,000 from 308,000 the prior week, a Labor Department report June 29 is forecast to show.

An index of Chicago-area business activity fell to 59 this month from 61.5 in May, the National Association of Supply Management-Chicago is expected to report on June 30. Readings greater than 50 signal expansion.


Date Time Period Indicator BN Survey Prior
06/26 10:00 May New Home Sales 1150,000
1198,000
06/27 10:00 June Confidence-Conf. Board 103.8 103.2
06/27 10:00 May Home Resales 6.62M 6.76M
06/27 10:00 June Richmond Fed. Manf. 7.0 1.0
06/29 8:30 6/17 Continuing Claims 2430K 2439K
06/29 8:30 1Q F GDP Price Index 3.3% 3.3%
06/29 8:30 1Q F Gross Domestic Product 5.6% 5.3%
06/29 8:30 6/24 Initial Jobless Claims 310K 308K
06/30 8:30 May Personal Income 0.2% 0.5%
06/30 8:30 May Personal Spending 0.4% 0.6%
06/30 10:00 June Chicago Purchasers 59.0 61.5
06/30 10:00 June F Confidence- U. of MI 82.5 82.4

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