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Economy Shows Unexpected Strength In Latest Reports

Economic data released this morning offered several signs of a robust economy, with sales of existing homes, consumer confidence and Chicago-area factory activity all showing surprising strength.

"This morning's stronger-than-expected trio of economic reports makes any lingering worries about recession seem so passe," said John Silvia, chief economist at Wachovia. "Consumers are clearly more comfortable with the current economic environment. While, the housing market and motor vehicle industry appear to be leveling off at a pace that does not threaten the broader economic expansion."

The pace of existing home sales rose slightly in November, hitting a 6.28 million-unit annual rate, according to a report from the National Association of Realtors. The 0.6% gain modestly topped economists' expectations.

November saw the second consecutive rise in sales volume but the median home price dropped 3.15%, the fourth straight month of year-over-year fall in prices.

The inventory of homes for sale was down 1% at the end of November to 3.82 million units.

Analysts expected home resales to slow to 6.20 million-unit pace from the 6.24 million-unit rate in October.

Consumer Confidence Rises

Meanwhile, consumer confidence improved to its strongest in eight months in December after lackluster performance through the fall. But a private research group said Thursday it was too soon to determine if its reading was signaling genuine improvement.

The Conference Board said that its Consumer Confidence Index rose to 109.0 in December from a revised 105.3 in November and 105.1 in October.

The reading was the highest since the index registered 109.8 in April and was better than Wall Street anticipated. Analysts had been expecting a slight decline in the December reading to about 102.5.

Lynn Franco, director of the board's consumer research center, said in a statement accompanying the report that despite the reading "there is little to suggest that the pace of economic activity in the final quarter of 2006 is anything but moderately better than its uninspiring performance earlier this year."

"Given the seesaw pattern in recent months, it is too soon to tell if this boost in confidence is a genuine signal that better times are ahead," she added.

Growth In Factory Activity

Business activity in the Midwest expanded in December at a faster rate than expected although hiring contracted, a report showed on Thursday.

The National Association of Purchasing Management-Chicago business barometer rose to 52.4 in December on a seasonally adjusted basis from 49.9 in November, returning to a level that suggests expansion.

Economists had forecast the index at 51. A reading above 50 indicates expansion.

The employment component of the index fell to 45.8 from 49.4 in November. Prices paid were steady at 60.2 and new orders rose to 57.8 from 52.0.

"The survey suggests expansion of manufacturing, but it is just a regional survey. We have to wait until Tuesday for the Institute for Supply Management (national) report," said Michelle Meyer, economist at Lehman Brothers in an interview with Reuters.

Many analysts consider the NAPM-Chicago survey as a factory-sector report since the region is relatively industrialized, but service sector firms are also polled.

The index measures activity by companies based in the Chicago area, even if they have operations elsewhere.

Earlier this month, the Institute for Supply Management's survey of U.S. manufacturing in November showed a contraction in factory activity for the first time in three and a half years, with the key index falling to 49.5. A drop in the ISM below 50 has historically been a reliable predictor of Fed interest rates cuts.

Holding Off on Cuts

However, the latest round of economic data bolsters the view that the central bank will hold off on changes to its key short-term borrowing rate. The Federal Open Market Committee has left unchanged its benchmark federal funds rate at 5.25% at each of its last four meetings, following a two-year stretch of steady rate increases.

According to Goldman Sachs economist Jan Hatzius, the improvement in the Chicago PMI could reflect a rebound in vehicle output.

"Despite the better tone of this report, we expect the ISM manufacturing index (which will be released on Tuesday) to fall to 49 from 49.5," Hatzius said. He cited the recent weakness in several other regional indexes as well as his firm's own index as contributors to his opinion.

Earlier, a government report showed the number of workers filing new claims for unemployment benefits rose slightly in the latest week, while claims for those already receiving benefits increased for the fourth time in five weeks.

This report supports the view that the jobs market remains relatively stable. However, the increase in those already continuing to collect jobless benefits suggests some slackening in the labor market.

The Fed has held the view that as long as the labor market remains tight, inflation may continue to be a risk to the economy.