- The Washington Times - Wednesday, December 1, 2004

The largest drop in oil prices in three years combined with the biggest housing price gains in 25 years and other bullish economic news sparked a strong rally on Wall Street yesterday.

The Dow Jones Industrial Average soared 162 points to 10,590 and the Standard & Poor’s 500 index hit a new three-year high on evidence of a rebound in consumer spending and manufacturing and a tumble in oil prices. The $3.64 drop in premium crude to $45.49 a barrel was the most since September 2001 and $10 below the record high set a month ago.

“We are ending the year very, very strong,” said Norbert Ore of the Institute for Supply Management, which reported the pickup in manufacturing last month. “It just speaks to the strength of this economic cycle.”

Oil prices plunged after the Energy Department reported a big rise in stores of heating oil and other distillate fuels that had been in short supply at the beginning of the heating season. The report triggered an avalanche of selling by investors who had been betting on a further run-up in oil prices this winter.

The past month’s fall in oil prices should boost disposable income and consumer spending, economists say, as will the average 13 percent annual gain in home prices reported by the government during the summer quarter — the fastest since 1979.

Home prices in the Washington area rose a stunning 24 percent in the third quarter compared to the comparable period last year, the report said. Rising wealth from home equity has outpaced gains from stocks, bonds and other investments in recent years, and many homeowners have been tapping into their growing wealth through home equity loans to finance other purchases.

Consumers also were bolstered by renewed growth in jobs and incomes in October, with a solid 0.6 percent rise in incomes spurring a 0.7 percent increase in consumer spending, the Commerce Department reported. That was before oil prices declined.

“In spite of oil prices in excess of $50, consumer spending has been quite strong, and I don’t think energy prices are going to crimp holiday sales,” said Ken Mayland, president of ClearView Economics LLC. “I’ve got to believe this gets the fourth quarter off on a very solid footing.”

The spending report prompted some economists to increase their estimates of year-end economic growth. Others were skeptical, noting that higher prices for fuel and food have absorbed much of consumers’ increased incomes recently.

Also, the Commerce Department report showed that consumers have dipped deeply into savings to feed their spending binge, driving the savings rate near record lows at 0.2 percent of disposable income.

The spending news was good for retail stocks, which rocketed higher after posting declines earlier this week on reports of a tepid beginning to the Christmas shopping season.

Also yesterday, a survey by the Business Roundtable found that half of corporate leaders plan to increase capital spending next year, adding to the momentum that consumer purchases have afforded the economy.

A second Commerce Department report showed construction spending stayed at a record high seasonally adjusted annual rate of $1.01 trillion in October as a result of a 1.2 percent jump in spending on highways and infrastructure by state and local governments.

“The economy is doing a lot better than people had feared a few months ago,” said Daniel Pfaendler, a strategist at Dresdner Kleinwort Wasserstein.

Adding its voice to the cacophony of good economic news yesterday, the Federal Reserve staff reported that the expansion continued with “numerous reports of hiring” around the country.

“We have been seeing more positive signs in the economy and now can have greater confidence that the economy is on course for self-sustaining growth,” said San Francisco Fed bank president Janet Yellen in a speech in Phoenix.

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