Economy steaming ahead, despite energy
High fuel prices and rising interest rates were expected to cool things off, but the most recent numbers show no signs of that.
By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - High energy prices generally aren't the fuel of a hot economy. But you can't prove it by recent economic numbers.

Wednesday saw an exceptionally strong jump in sales of durable goods, the big ticket items ranging from commercial jets to washing machines, and the biggest percentage increase in new home sales in nearly 13 years.

And those reports follow a strong existing home sales reading Tuesday, and a survey showing consumer confidence at a four-year high.

Friday comes the report on gross domestic product, the government's broad measure of the nation's economic activity in the first quarter. Economists surveyed by Reuters forecasting an annual growth rate of 4.9 percent in the period, with estimates as high as 5.8 percent.

All of this comes with oil prices solidly above $70 a barrel, average gasoline prices climbing near $3 a gallon, and rising expectations the Federal Reserve will hike short-term interest rates at both its May and June meetings, instead of just one more time.

While a May hike has been widely expected for months, there's been debate about whether another hike in June is necessary, a debate that seemed to tip to expectations of no increase when the Fed last week released the minutes of its most recent meeting in March.

A number of economists say much of the first-quarter strength can be explained away by saying the economy was playing catch-up from weak fourth-quarter growth of 1.7 percent annual growth following the hurricanes, coupled with a boost from the warmest January on record.

But with March economic numbers now showing strength heading into the second quarter, it's not as easy for economists - or Fed policymakers - to discount a big first quarter gain.

And because of the expectation that the Fed could hike rates again in June, Treasuries sold off again Wednesday. The yield on the benchmark 10-year note reached a midday high of 5.13 percent, a level not seen since May 2002.

What slowdown?

All of which leaves many economists scratching their heads as they look for the slowdown they've been predicting.

"My guess is things will cool abruptly; the question is do they do it by June 29," said David Wyss, chief economist for Standard & Poor's, referring to the date of the Fed meeting in June.

Wyss is still forecasting the Fed will stop raising rates after taking the fed funds rate up another quarter percentage point to 5 percent on May 10. But he concedes it's looking less and less likely he'll be able to stick with that forecast.

"The second quarter is shaping up to be stronger than expected," said Wyss, who is now forecasting 4 percent growth in that quarter. Even recent energy price increases don't seem to be slowing down the economy, he said.

"Common sense says consumers have to stop spending money at some point. But consumers haven't shown much common sense lately, despite griping about gas prices," Wyss added.

Still the March numbers causing so much worry in the market will be ancient history for both the Fed and economists by the end of June, when two more months of readings on such key measures on consumer prices or job creation will be considered.

And it's not clear how much of the strength being shown in March readings really reflect the run-up in energy prices seen over the last month. The AAA showed the average price for a gallon of regular unleaded at $2.501 on March 26, making March seem like the good old days as prices now move toward the $3 a gallon threshold.

So a month from now, when the gasoline prices start to be seen in the April numbers, all the talk could be about a cooling economy, not a hot one, and a June hike by the Fed could again be off the table. But it's very much in play right now.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.