Economy Watch: Rates Up, Life Goes On

As expected, the Federal Open Market Committee raised the short-term rates that the Fed charges, up 25 basis points, on Wednesday. No reports were received of the sky falling. Stocks closed up by the end of trading, with the Dow Jones Industrial Average, which had been up only a little before the FOMC’s mid-afternoon announcement, gained 224 points, or 1.3 percent, for the day. The yield on the 10-year Treasury note rose slightly to 2.29 percent, and gold lost some ground, possibly because the perception of a stronger U.S. economy hurts demand for the yellow metal.

The central bank, at least, seems to think the economy’s strong enough for the measure. “Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent,” the FOMC said in its statement. As usual, the Fed was cagey about the timing of further increases: “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.”

Meanwhile, other economic indicators were published on Wednesday. One of particular interest to the commercial real estate industry was the Architecture Billings Index (ABI), compiled by the American Institute of Architects. As has been the case a few times already this year, the ABI dipped in November. As a leading economic indicator of construction activity, the index reflects the nine- to 12-month lead time between architecture billings and construction spending.

The November ABI score was 49.3, down from 53.1 in October. The latest score reflects a decrease in design services, since any score above 50 indicates an increase in billings. The new projects inquiry index was 58.6, up a bit from 58.5 the previous month. “Since architecture firms continue to report that they are bringing in new projects, this volatility in billings doesn’t seem to reflect any underlying weakness in the construction sector,” said AIA chief economist Kermit Baker. “Rather, it could reflect the uncertainty of moving ahead with projects given the continued tightness in construction financing and the growing labor shortage problem gripping the entire design and construction industries.”