War, snow maintain economic gloom
By Martin Crutsinger
Associated Press
WASHINGTON — Business spending kept in check by the possibility of war and consumers kept at home by a snowstorm helped keep the U.S. economy subdued, the Federal Reserve reported yesterday.
Hardware sales saw a silver lining, the central bank noted: Fears of terrorism and the snow in the Northeast boosted the sales of duct tape, plastic and shovels.
The Fed's latest survey of economic activity compiled from information supplied by its 12 regional banks showed little pickup in the first part of the year following a major slowdown in the last three months of 2002.
"Growth in economic activity remained subdued in January and February. Only a few districts reported any notable changes from the last Beige Book," the Fed said in the report named for the color of its cover.
"Many reports indicated that geopolitical and economic uncertainties were constraining consumer and business spending and tempering near-term expectations," the Fed said in the survey prepared for the March 18 meeting of the Fed's interest-rate setting Federal Open Market Committee.
For Hawai'i, the Fed's San Francisco District that covers the state said "both domestic and international tourism continued to improve; however, the improvement was below expectations and the level of international tourism still has not recovered fully after slumping in 2001."
Looking ahead, the Fed said adverse effects on tourism from a potential war would more than offset any gains from the weakening value of the dollar in the foreign exchange market.
Most economists believe Fed policymakers will leave a key interest rate unchanged at its next meeting, preferring to wait until they have better information on the outcome of any U.S. war with Iraq.
The central bank last changed interest rates on Nov. 6 when it reduced its target for the federal funds rate, the overnight borrowing rate for banks, by an unexpectedly large one-half point to 1.25 percent, a 41-year low.
The Fed passed up chances at meetings in December and late January to cut rates further, believing it had done enough to jump-start growth. It preferred to preserve the few rate cuts it has left in case they are needed to cushion the U.S. economy from adverse consequences of a war, such as a terrorist attack on U.S. soil or a spike in oil prices.
Economists said the lackluster tone was not a surprise given a variety of indicators showing that outside of home sales, the economy lacks strength. Manufacturers continue to struggle and the job market remains soft.
"The economy is basically treading water right now until the geopolitical situation becomes clearer," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "This sideways movement will continue until the worries about the war are out of the way."
The central bank said that business investment spending for new plants and equipment, the missing ingredient which has kept the current recovery at half-speed, remained absent in the January-February period.
The central bank found that consumer spending, the one major force lifting the country out of the 2001 recession, was weak at the start of the year, in part because of a drop-off in new auto sales and a major snowstorm in the Northeast over Presidents' Day. That holiday is usually retailers' biggest sales weekend in the first quarter of the year.
One bright spot for consumer demand was in the sale of items that the new Department of Homeland Security has suggested Americans should have on hand in the event of a terrorist attack.
The regional banks in Boston and Richmond, a district which includes Washington, D.C., reported big sales gains for duct tape, plastic and other hardware goods. The Boston Fed said hardware stores in its region were reporting double-digit sales gains over a year ago, attributing the increase to both to a run on show shovels and the heightened terrorism fears.
Most districts said that manufacturing, the hardest hit sector of the economy in the 2001 recession, was seeing only scattered signs of improvement.
The central bank also noted business concern over rising insurance costs and energy prices.
The government will report February's unemployment rate tomorrow and many analysts believe continued layoffs will drive that number up to 5.8 percent, from 5.7 percent in January.
