Home Starts Up as Jobless Claims Fall

WASHINGTON —  Stronger-than-expected housing starts and shrinking claims for jobless benefits bolstered arguments Thursday that the Federal Reserve Board will boost interest rates next week to keep the economy from overheating.

The Commerce Department said construction of single-family homes and apartments shot up 4.5% in August to a seasonally adjusted 1.53 million annualized rate--the highest in nearly 2 1/2 years. Analysts had expected a slight drop.

The Labor Department reported that new claims for unemployment insurance dropped last week by 2,000 to 329,000 and said 7,000 fewer applications were filed the previous week than initially thought.

Economist Sung Won Sohn of Norwest Corp. in Minneapolis said the reports present a strong case for higher Fed rates as insurance against any surge in inflation.

“After all . . , economic growth is slowing, but not fast enough,” he explained. “It is still exceeding Chairman Greenspan’s economic speed limit.”

Although he did not specify a desired growth rate, Fed Chairman Alan Greenspan told Congress this summer that unless the economy slowed soon, the central bank would be forced to raise rates.

Fed policymakers next meet on Tuesday.

“There’s a good chance they will vote to tighten by 25 basis points, but a slightly better chance they won’t,” contended Fannie Mae economist David Berson. “It’s a close call.”

If the Fed does raise the target for its federal funds rate to 5.5% from 5.25% now, it would be the first increase in 19 months. Some analysts expect a similar increase in the 5% discount rate, which would be the first since February 1995.

The federal funds rate is what banks charge each other for overnight loans, which the Fed can influence to keep it in the desired range. The discount rate is what the Fed charges commercial banks for loans. Any increases probably would be reflected quickly in increased costs for business and consumer loans.

The Commerce Department also revised its reports for June and July. Housing starts fell 2% in July, more than the original 1.3% estimate, but rose 0.8% in June rather than declining 0.3%.

Still, David G. Seiders, economist for the National Assn. of Home Builders, predicted construction would level off during the remainder of the year.

He said the association’s housing market index fell in September for a fourth straight month. All three index components declined--current sales, traffic by prospective buyers and sales expectations over the next six months.

According to the Commerce Department report, applications for building permits--a barometer of future activity--fell 4.4% in August for the third decline in four months. Permits for single-family homes--80% of new residential construction--were flat after falling for three months.

But in August, single-family starts jumped 8.3% to a 1.24 million rate, more than compensating for the 5.5% drop of July. It was the biggest increase since an 8.6% gain in July 1995 and the highest level since a 1.28-million rate in March 1994.

Construction of apartments and condominiums, something that’s often volatile but not as sensitive to interest-rate changes, fell 9.5% to a 287,000 rate. It had shot up 12.8% in July.

Regionally, housing starts climbed 13.5% in the West to a 378,000 rate. They were up 7% in the Northeast to 138,000 and 2.8% in the South to 667,000. But they declined 2% in the Midwest to 342,000.

Housing Starts

Seasonally adjusted annual rate, millions of units: 1.53 (August 1996).

Source: Commerce Department