Signs of an economic surge

Despite some weaknesses, the economy could grow at a 4 to 5 percent rate this quarter.

The economy is about to enter spring with a roar.

Auto showrooms are busy once more. Businesses are buying new computers, machine tools, and conveyor belts. The consumer is resilient, so far defying forecasts of a pullback.

In fact, the economic rebound from the slowdown at the end of last year is likely to be dramatic. Some economists think the economy is now moving ahead at a 4 to 5 percent annual rate - just about as good as it gets during a long period of rising interest rates. This sparkling economic performance - the fastest growth in three years - comes even at a time when the housing market, long the bulwark for the economy, is showing clear signs of slowing down.

"The economy is regaining momentum and will have a very solid first half of the year," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "We all feel more confident than we did three months ago, when we were still wondering about the impact of the hurricanes."

Some of that impact showed up Tuesday when the Commerce Department released a revised reading of the gross domestic product in the fourth quarter. It now says the economy grew at a 1.6 percent annual rate, up from the original estimate of 1.1 percent. The reasons for the slight uptick: government spending, software sales, and an improvement in exports.

The economy's overall tepid performance last quarter was largely due to a slowdown in auto sales, following a large incentive-driven increase in the third quarter. Now, auto sales are back on a roll, says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "The mild weather in January helped. The anecdotal evidence for February is mixed, but some analysts are saying people are back buying SUVs again," says Mr. Brown.

Tuesday, the Conference Board, a research group in New York, released a consumer-confidence survey showing that Americans' optimism over the short term is at a 4-1/2 year high. However, the Conference Board's index also showed that consumers are less optimistic about the future. "These cooling expectations are not positive for the second half, which could be somewhat slower," says Lynn Franco, director of the board's Consumer Research Center.

One cloud hanging over the economy is the softening in the housing market. On Monday, the Census Bureau reported that sales of new homes dropped 5 percent in January. The inventory of unsold homes could keep the market supplied for 5.2 months, the highest level in 10 years. Tuesday, the National Association of Realtors reported that sales of existing homes fell by 2.8 percent in January, the fifth consecutive month of declines. However, home prices remained unchanged from December.

"In most markets, the boom phase of the real estate cycle is behind us," says John Karevoll, an analyst at San Diego-based DataQuick, which keeps track of home sales. "The market is reestablishing a balance between supply and demand, buyers and sellers."

Mr. Karevoll says price increases are slowing down. "We're now down to the low teens [in percentage increases] and will be getting into single digits by this spring and summer," he says. One important indicator he watches - condo and house flipping - is no longer a big factor anymore.

There has only been a slight lull in Shepherdstown, W.Va., says Gary Phalen, a mortgage banker there at First National Mortgage Source. "We do see homes sitting a little bit longer," he says, "but housing appreciation is still about 12 to 17 percent."

Activity in the region is beginning to pick up as people start to think about moving this summer. "We are prequalifying a lot more people now" for mortgages, he says. "The region is going to get quite a boost since Toll Brothers [a developer] has purchased a huge tract of land."

In a survey of economists taken in the beginning of February, the National Association for Business Economics (NABE) found the biggest risk to the economy is the high and rising cost of energy. "The NABE has shifted to the extent that oil prices will stay high," says Mr. Hoffman, who is also president of the organization. "The consensus had been for oil at $53 a barrel. Now it's moved up to $59 a barrel." Tuesday morning, the price of oil was about $61 a barrel on the futures market.

The price of oil is important because high gasoline prices could keep consumers from driving to the mall. And business is quick to pick up on any shifts in consumer patterns. "Over the long term, consumer spending and business spending tend to go hand in hand," says Brown, noting that a Chicago purchasing managers' report Tuesday showed a slowing of new orders. The Chicago survey often reflects business spending since the region is an area where many capital goods are built.

Some surveys may show a slowdown in business spending, but that's not the case for Larry Roshfeld, a senior vice president at CorasWorks, which helps companies manage projects using Microsoft platforms. Since October, he estimates the Reston, Va., company has increased the size of its sales force by 50 percent.

"People are saying, 'We weathered the storm,' and they are spending," he says. "It's across the board - state, local, and federal government to old-world manufacturing of hard goods to financial services. Even sectors hit hard are starting to spend from our perspective."

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