Posted on: Thursday, June 12, 2003

Fed sees signs of rebound

By Martin Crutsinger
Associated Press

WASHINGTON — The weak U.S. economy, which has suffered thousands of job losses in recent months, may be on the verge of a rebound now that the Iraq War is over, the Federal Reserve said yesterday.

The central bank said that four of its 12 districts — Dallas, Kansas City, New York and Minneapolis — detected signs of increased economic activity. No district reported further deterioration since the last report in late April.

"The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggest that the effect has not been dramatic," the central bank said in its latest survey of business conditions.

The central bank cautioned against reading too much into the scattered signs of a rebound, describing overall activity in many districts as still "sluggish, subpar or subdued."

The survey of business conditions, known as the beige book for the color of its cover, will be used by Fed policy-makers when they meet June 24 and 25 to set interest rates.

Many analysts are convinced that the Fed will cut rates for a 13th time in an effort to ensure that the weak patch the country is going through does not deepen into something worse, such as another a recession.

The Federal Reserve said economic conditions in Hawai'i are stronger than in most Western states.

"Commercial and industrial loan demand remained weak in most areas, except in Hawai'i, which saw further expansion because of relatively robust economic conditions," according to the report from Fed's San Francisco district.

The Fed noted that Hawai'i even had a shortage of construction labor, in contrast to most areas where labor is in ample supply.

The Fed said the effect of the SARS epidemic in East Asia reduced business and leisure travel in recent weeks, although in Hawai'i and Las Vegas, weak international tourist traffic was largely offset by solid domestic tourism.

The conviction among analysts that the central bank is prepared to reduce its target for the federal funds rate, already at a 41-year low of 1.25 percent, has been strengthened by recent comments made by Fed Chairman Alan Greenspan. He has said the Fed would do whatever is necessary to guard against the remote possibility that economic activity in the United States will slow so much that deflation — a widespread fall in prices — could become a problem.

The United States has not been hit by a period of deflation since the Great Depression of the 1930s. However, the fact that Greenspan has even talked about the threat of deflation, remote as it might be, has been read as a strong signal that the central bank is ready to cut already low interest rates even further and keep them low for some time to come.

In a speech yesterday, Federal Reserve Vice Chairman Roger Ferguson described the country's near-term economic prospects as "still somewhat clouded."

Ferguson, addressing the Japan Society in New York, said that recent readings on employment and industrial output have been disappointing. But he said there had been some encouraging signs as well in terms of declines in crude oil prices and a rebound in consumer confidence. He said a pickup in corporate earnings was helping to fuel a rebound in the stock market.

But Ferguson said, "Whether this improvement in overall financial conditions is a precursor to sustained recovery in the broader economy is unclear."

The beige book said consumer spending remained lackluster in May, with retail sales rebounding with the end of the Iraq war but still remaining below the levels of a year ago. Many analysts believe that consumer spending will remain depressed until the unemployment rate turns around.

The jobless rate hit a nine-year high of 6.1 percent in May, the government reported last week, even though the pace of layoffs slowed.

The Fed's survey detected some improvements in the beleaguered U.S. manufacturing sector, which has suffered 34 consecutive months of job losses. Three districts — New York, Minneapolis and Cleveland — reported an increase in manufacturing activity while three others — Philadelphia; Richmond, Va.; and Boston — indicated further deterioration. The remaining six Fed districts said there had been little change in industrial activity, which they reported remained sluggish.

The lowest mortgage rates in four decades continued to provide a boost to the housing industry. But the survey found that commercial real estate remained in a slump.

The decline in the dollar was helping U.S. exports, with the San Francisco Fed district reporting increased overseas demand for American beef and farm crops.