Posted on: Monday, August 18, 2003

Economy looking brighter

By William Sluis
Chicago Tribune

With rising interest rates beginning to take a chomp out of the mortgage market, it may be only a matter of time until housing begins to slow. But don't look for any kind of collapse, at least not yet.

In the immediate future, home seekers may create a rush to buy so they can lock in a loan before rates rise again.

Chicago economist Peter Glassman expects tomorrow's report of July housing starts to show no change from the very strong annual rate of 1.8 million units recorded in June.

"There are a lot of fence-sitters who are jumping into the market before mortgage rates go any higher," said Glassman, of Bank One Corp.

He said the surge in sales is likely to last several months, but a continuation of rising mortgage rates means trouble ahead for home builders.

"In past cycles, developers have waited too long before cutting back," Glassman said. "They just can't detect the new trend until it arrives. The result is overbuilding, where houses will need to be sold at a sacrifice."

While rising rates offer a warning message for the construction industry, Glassman said it is unlikely there will be any general deep slowdown for housing unless mortgage pressures persist quite a while.

Meanwhile, after tracing out a weak, wobbly pattern during the runup to the war in Iraq, the leading economic indicators have begun showing signs of flexing some muscle.

That's good news, because the series is supposed to be able to peer into the future six months or more.

Economist John Silvia is looking for the index for July, to be announced Thursday, to show a gain of 0.5 percent or 0.6 percent, on top of a small advance a month earlier.

"This will make four months in a row that the leading indicators have gone up, and that is a very positive sign," said Silvia, of Wachovia Securities in Charlotte, N.C.

He said some credit for economic revival must go to members of the Federal Reserve, who have flooded the economy with money, and also to new federal tax rebates, which have been arriving at the homes of taxpayers with kids.

"We are seeing a decline in weekly claims for unemployment insurance, strong consumer spending and growing evidence that businesses are stepping up orders for capital goods," Silvia said.

In all, he said, "there are many signs that the economy is continuing to improve."

The final month of the third quarter is rapidly approaching, with vacationers at the beach or in the mountains keeping a countdown toward Labor Day.

Schools are starting to reopen. For corporations, it will soon be time for confession season, when they own up to any shortfalls in expectations.

For now, analysts expect corporate profits for the quarter to grow at a double-digit pace from the dismal results a year earlier. Upside surprises are expected to exceed downbeat forecasts.

The stock market saw little effect from last week's power failure that hit many eastern cities, including New York. Traders are focused on taking it easy during the dog days, with prices locked in a range that hasn't changed much since June.

Despite the general torpor, Chicago investment manager Marshall Front thinks there is room for prices to head higher between now and the end of this year.

"Given the momentum with which the economy ended last quarter, and the recent pickup in business spending, we are raising our growth forecast for the remainder of this year to an above-trend rate of 4 percent," said Front, of Front Barnett Associates.

He sees profits, which have exceeded forecasts for the past six months, continuing to grow.

Front's bottom line: "We believe the stock market will move higher once the current period of consolidation has run its course."