U.S. Economy Is Red-Hot, Reports Say

New data released Tuesday show the U.S. economy is continuing to expand at such a strong pace that the Federal Reserve Board will probably raise interest rates again next month unless there are clear signs that growth is slowing, analysts said.

The surge in growth, which began late last year and surprised both Fed officials and private forecasters by continuing undiminished into this year, is strong enough that it could soon drive the nation’s jobless rate below 5% for the first time in nearly a quarter of a century, the analysts warned.

“The economy is really strong,” said Fed Gov. Laurence H. Meyer, who won forecasting awards before joining the Fed board last year. “This is not a fluke.”

Fed officials, concerned that falling unemployment could cause wages to rise much more rapidly and lead to higher inflation, raised a key interest rate last week.

Meyer would not comment directly on what the Fed might do at its next policymaking session May 20, but an increasing number of analysts believe the Fed will raise rates without data to dissuade it.

The National Assn. of Purchasing Management said Tuesday that its survey found that the manufacturing sector of the economy expanded last month at the fastest rate in more than two years. And the Commerce Department said construction spending rose 2.3% in February--a large increase that led to the addition of 109,000 workers to construction payrolls that month.

Separately, the Conference Board, a private business research group in New York, said its index of leading economic indicators rose 0.5% in February, to 103.5. Forecasts had called for an increase of between 0.2% and 0.4%.

Nine of the 10 indicators measured by the index pointed to growth. The biggest change among the components came in the average weekly claims for unemployment insurance. That signaled to economists and investors that Friday’s job growth and unemployment data for March might be strong and further fuel a Fed tightening.

As a result of such numbers, many analysts, as well as Fed officials, have been revising upward their forecasts for the first half of this year, with some suggesting that growth in the first quarter may have come close to matching that of the final three months of 1996 when the gross domestic product, adjusted for inflation, rose at a 3.8% annualized rate.

The combination of last week’s Fed action, the continuing flow of strong economic statistics and the possibility of more rate increases to come triggered a sell-off in both the stock and bond markets during the last week.

Both markets appeared to stabilize Tuesday, with the Dow Jones average of 30 industrial stocks closing at 6,611.05, up 27.57 points, after falling a total of nearly 300 points in the previous two trading sessions. And bond prices rose, driving yields down to 7.07%.

Bruce Steinberg, macroeconomics manager at Merrill Lynch & Co. in New York, is one of the economists who have recently raised their estimates for first-quarter growth, partly because of reports that indicate consumer spending rose at an exceptionally high 5% rate during the period.

During the last two quarters, the rise in household purchases increased at the fastest rate in nine years, he said.

“There is no doubt that the U.S. economy was growing rapidly in the first quarter, but the question is what happens next,” Steinberg said. “In our view, the economy is about to slow down. But if it doesn’t slow down, the Fed will make sure it does.”

Meyer said it was the combination of the already low jobless rate and the unexpectedly strong growth that threatened to drive it even lower that caused him to decide a rate increase was necessary last week.

He and other policymakers, including Fed Chairman Alan Greenspan, had been concerned for months that the low unemployment rate--5.3% in February--would sooner or later cause inflation to worsen. But while concerned, they had no firm evidence that they were right; nor do they have such evidence now, Meyer said.

What changed was the additional growth, which raised the risk that the nation’s labor markets will become so tight that inflationary pressures are sure to increase, although that hasn’t happened yet, Meyer said.

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Index of Leading Economic Indicators

Seasonally adjusted index of leading indicators; 1987=100

February 1997: 103.5

Source: Conference Board

Purchasing Managers Index

In billions of dollars, seasonally adjusted:

March 1997: 55%

Source: National Assn. of Purchasing Management