Two rounds of interest rate increases by the Federal Reserve--the latest this week--will slow the Washington area economy to a more sustainable pace for the balance of this year, according to regional economists.
"This is an insurance policy for the economy," said Stephen S. Fuller, professor of public policy at George Mason University.
The area economy, much like the national economy, has been growing at a record pace. Increases in retail sales, housing construction and employment over the past year have heightened concerns about a rebirth of inflationary pressures.
But that's not the outlook now.
The most recent Labor Department employment survey of the region, released this week, shows a continuation of a slowdown in hiring that began in the spring. The metropolitan region's business establishments added 69,900 jobs over the 12 months ending in July, a 2.7 percent annual growth rate that is below the 3 percent-plus pace at the beginning of the year.
Unemployment rates in the region also remained low in July. The District's rate dipped to 6 percent from 6.1 percent in June. Virginia's dropped to 2.7 percent from 2.8 percent in the previous month, while Maryland's rate edged upward, to 3.8 percent from 3.6 percent in June. The low unemployment rates highlight a shortage of workers that is hampering hiring in the region, economists say.
The Fed's move on rates last Tuesday--a quarter-point increase to 5.25 percent on loans banks make to each other--will reinforce a slowdown that is already underway. "We will see a moderation in growth, but that's something desirable and not to be worried about," said Mark Zandi, chief economist at RSA Dismal Sciences in West Chester, Pa.
The housing sector is expected to be the hardest hit by the rate increase. The interest rate on 15- to 30-year mortgages is already up significantly this year, from 6.9 percent in the past few months to about 8 percent now.
Although some builders say there is a large backlog of orders, economists expect the numbers to start shrinking. "We will see a softness towards the end of this year and early next year," said Anirban Basu, senior economist at RESI, a research institute of Towson University.
According to the U.S. Census Bureau, the number of residential building permits in the Washington area has been falling. In June of this year, the permits fell to 3,136 from 3,475 in the same month last year.
Fewer new houses could mean a slackening in demand for consumer durables, including major appliances and big-ticket furnishings. This sector has been on a roll ever since the economy came out of recession in mid-1992. From less than $900 million in 1993, durables sales in the area had risen to $1.7 billion by May this year. However, the year-to-year growth rate in durable sales is slowing.
"Durable sales will come off their rapid pace over the next few months," said Mark P. Vitner, vice president and economist at First Union Corp.
Consumers in the Washington area still seem more upbeat about the economy as the local consumer confidence index gained 5.3 points, even as its national counterpart lost 3.7 points last month. That's likely to change, however, economists predict.
"It is likely that consumer spending will now be moderated by the higher interest charges," Fuller said.