U.S. Economy Is Gaining, Fed Report Finds : Recession: The central bank notes a nationwide upturn in manufacturing. The news dims prospects for lower interest rates.
The economy continued to improve early this month with an upturn in manufacturing evident nationwide, the Federal Reserve said Wednesday in a report that dims the prospect for lower interest rates.
“Economic activity continues to improve. The manufacturing sector appears to be strengthening in all” regions, it said.
The central bank’s mildly upbeat assessment of regional business conditions means, according to analysts, that it probably is in no hurry to speed growth with lower rates.
That puts it in conflict with Bush Administration officials who are looking for lower rates to ensure that the recovery from the 1990-91 recession does not fizzle out before the November election.
“I think pretty clearly the Fed’s going to be reluctant to ease” monetary policy, said economist Mark Zandi of Regional Financial Associates in West Chester, Pa. “There’s a predilection at the Fed to hold the status quo unless conditions deteriorate substantially.”
Monetary policy-makers are expected to use the report, known as the “beige book,” when they meet June 30 to plan their strategy for managing the money supply and interest rates through midsummer.
During three years of economic stagnation and recession, the Fed has pushed interest rates down substantially.
Since April 9, however, it has paused, leaving the federal funds rate, the interest banks charge each other for overnight loans, at 3.75%.
The survey’s finding, based on interviews of business contacts conducted before June 9 by the Fed’s 12 district banks, are consistent with other economic statistics showing a slow but sustained recovery, including a big gain in productivity reported Wednesday by the Labor Department.
Productivity of non-farm workers--defined as output per hour of work--jumped 2.7% from January through March, the best showing since the second quarter of 1990, just before the recession began.
Economists believe that improved productivity is the key to sustained, non-inflationary growth.
However, the improvement detected by the Federal Reserve and evident in many statistical measures has yet to show up in what most Americans consider the most important economic indicator--the unemployment rate, which in May hit an eight-year high of 7.5%.
But at least in manufacturing the central bank found some signs of an upswing.
It found factories hiring more people in the Chicago, Philadelphia and Richmond districts. Firms in the Atlanta region worked existing employees longer.
And at least one in four manufacturing firms questioned in the Boston, New York, Philadelphia and Richmond districts expected to hire new employees within six months.
In addition to manufacturing strength, the survey reported increases in consumer spending everywhere except the Northeast and the West Coast.
Housing construction activity remained well above last year’s levels in most areas, and demand for bank loans was also increasing, it said.
The beige book also reported favorable inflation conditions, which would allow an interest rate cut if one were necessary.
“Price stability in the retailing and manufacturing sectors seems to be the rule across districts,” it said.
Among the negative developments noted by the report were the effect of a chilly and dry spring on many farm crops, declines in the defense and aerospace industries and a loss of retail and service jobs in Los Angeles because of the riots.
Although housing construction continues to be a source of economic strength in most areas, no appreciable improvement was found in commercial real estate, the Fed said.
Productivity
Non-farming business productivity, percent change from previous quarter at annual rate, seasonally adjusted.
First quarter, 1992: 2.7% (preliminary)
Source: Labor Department
Regional Outlook
1) Manufacturers were more positive than retailers, but both remained cautious. Some strong demand in autos. A subdued recovery expected; investment and employment plans modest.
2) Outlook mixed. Office leasing continued at moderate pace and conditions improved for manufacturers. But home building and retail sales slowed. Job market still poor.
3) Business conditions were improving slowly. Manufacturing increased; retailers reported higher sales; bankers said loan volume was steady.
4) Economy continued to expand slowly. Cool weather caused flat retail sales. Manufacturing output reviving. Mortgage activity eased but business loan demand improved slightly.
5) Conditions improved at a modest pace. Growth was reported in retailing, manufacturing, housing and port activity. Tourist industry mostly optimistic.
6) Economy continued to improve slowly. Retailers and auto dealers reported improvement in sales. Manufacturing increased. Home building steady; commercial construction not improved.
7) Manufacturing gained in recent weeks, while conditions in service-related industries were more mixed. Cool, dry weather hurt crops. Prices generally remained modest.
8) Manufacturing activity remained mixed; non-manufacturing employment continued to grow. Consumer spending steadily increased; home construction was up sharply from year-ago levels.
9) Economic conditions steady. Labor markets continued to show signs of mild improvements. Retail sales continued to grow while home sales retrenched. Manufacturing was holding its own.
10) Economy continued to grow slowly, led by consumer spending and residential construction. Retail sales improved. Demand for commercial bank loans rose. Energy remained depressed.
11) Economic activity expanded at a mild pace. Slight gains in manufacturing orders. Service firms reported a gradual, broad-based rise in orders. Real estate conditions remained good.
12) Economic conditions remained weak in California, but were improving in other states. In Southern California, cutbacks continued in aerospace and defense-related manufacturing, state government and higher education. Tourism fell after the Los Angeles riots. Elsewhere, the strongest conditions remained in Idaho and Utah.
Source: Federal Reserve
