Survey by Fed shows growth continuing

By Michael McKee
Bloomberg News Service

WASHINGTON — The U.S. economy continued to improve in July and August, the Federal Reserve said in its survey of regional economies. Eleven of the Fed's 12 regional districts said business activity picked up during the period.

The survey found gains in retail sales and manufacturing, while the blackout that struck the Northeast and Midwest on Aug. 14 had little effect on the economy.

"In some districts, improvement occurred in selected sectors, and in others it was broad-based," according to the report, known as the beige book.

Central bank policy makers will use the report when they meet to set interest rate policy Sept. 16. The Fed last month held its benchmark overnight bank lending rate at 1 percent, the lowest in more than 45 years. Policy makers will leave rates unchanged next month, according to all 68 economists in a Bloomberg survey.

Most Fed districts reported retail sales rose "at least modestly" in the beige book survey period, from July 31 to Aug. 25. "Reasonably strong" back-to-school sales were reported, along with higher home furnishing sales. Reports on auto sales were mixed, with dealers increasing incentives to attract customers.

(The San Francisco district, which includes Hawai'i, reported a modest increase in overall economic activity. The report noted that hotel occupancy in Hawai'i has inched up and new home construction continued at a brisk pace.)

The report "if anything appears to be understating the current vigor of the economic rebound," said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York.

Reports from the New York, Cleveland, Atlanta, Chicago, and Dallas districts mentioned the mid-August blackout. "The effects were generally small," the beige book said. "Even where firms were closed for several days, affected contacts suggest they are not anticipating difficulties in making up for lost production or shipments."

The brighter economic outlook isn't leading to an increase in hiring. "Labor markets remain slack across the nation, with few reports of occupational shortages," the survey said. Wage increases, "when they occur, are modest," although rising benefit costs have pushed up overall compensation.

San Francisco Fed Bank President Robert Parry, speaking on a teleconference as the report was released, said that while the economy may grow at a 3 percent to 4 percent annual rate in the second half of the year, it will take several quarters for the U.S. to work off excess capacity in labor and product markets.

That will enable the central bank to keep rates low "for a considerable period," Parry said.

Advertiser staff writer David Butts contributed to this report.