FIRST RISE IN EXISTING HOME SALES IN 5 MONTHS

FEDERAL OPEN MARKET COMMITTEE MEETS TOMORROW

The National Association of Realtors reported today that sales of existing homes rose by 6.5 percent in February. This corresponds to a seasonally-adjusted, annualized rate of 3.96 million home sales. This follows declines of 1.9, 1.7, 3.2, and 3.9 percent in the preceding four months. It seems that the recent rise in interest rates spurred previously-undecided buyers into action. The surge in buying was nationwide, with every region reporting increased sales.

Although sales rose in February, the inventory of unsold previously-owned homes has been increasing in recent months. This is understandable since sales have been declining. The stock of unsold homes in December represented a 4.6 month supply. This rose to 5.8 months in January and 6.2 months in February.

For many families, a home is the largest purchase they will ever make. Today's data shows that, during February, approximately 330,000 buyers felt sufficiently confident about their present and future financial situation to commit to such a purchase.

Will sales of existing homes continue to rise? Is today's report a signal of a pick up in general economic activity? We need to see further data to know for sure. If existing home sales continue to rise in the coming months, It would be reassuring if, at the same time, there was also a decline in the stock of homes available for sale.

The Federal Open Market Committee will hold its meeting a little earlier than usual tomorrow morning. This is so Chairman Greenspan can get away in time to appear before the Senate Banking Committee hearing on his renomination. So, before lunch time, we should have a reading on whether the Fed will be acting once again to lower short-term interest rates.

I took a look back over my reports since the last FOMC meeting to see if I could glean out any facts that might provide insight into what might happen tomorrow. Up until March 7 there didn't seem to be any hint that economic conditions were any different than they were back on January 31, when the Fed last met. In my first pass through the data I listed 15 different items of note; but, I eliminated 5 of them because they were either not current or not statistically significant. Here are the remaining 10:

March 7: Goldman Sachs reported that its same-store retail sales index rose by 4.9 percent in February -- the best monthly gain in a little over a year.

March 8: The Labor Department announced that nonfarm employment for February had increased by 705,000 -- twice the amount that anyone had predicted.

March 12: The Atlanta Federal Reserve Bank reported that in February its regional index of production fell from +3.7 to -9.0.

March 13: The Fed released it's "Beige Book" describing economic conditions in its twelve districts up until March 4. This report stated that the national economy grew modestly in January and February and described wage and price pressures as subdued. This did not include the March 12 Atlanta report or the March 21 Philadelphia report, which both showed slowing economic conditions in the most-recent month.

March 15: The Federal Reserve announced that its Index of Industrial Production had risen by 1.2 percent in February; but, that the end of the Boeing strike and the January blizzard probably both influenced this figure. I would tend to believe the Fed's number, because these two special circumstances would act to offset one another.

This report also discussed an uptick in capacity utilization in February, which tended to confirm the earlier-reported drop in the unemployment rate.

March 18: The National Association of Home Builders reported a surge in new home purchases in the February-to-March timeframe.

March 21: Philadelphia Federal Reserve Bank's March manufacturers survey shows general business index at a standstill.

March 25: Today's National Association of Realtors report shows a surge in existing home purchases in February.

Note that throughout this entire period no indicator of wages or prices revealed even a whiff of increasing inflation.

The last time the FOMC met, inflation was under control and all the other economic indicators were down or flat. This time, inflation is still under control. But, employment, retail sales, the housing sector, capacity utilization, and the Fed's own Index of Industrial Production have temporarily turned positive. What will the Fed decide to do? I believe that they will want to see some more data before they act, and that at tomorrow's meeting they will decide to leave interest rates unchanged.

Byline: Lafferty (MF Merlin)