- The Washington Times - Thursday, June 13, 2002


The economy's recovery from the recession last year is shaping up to be choppy.

That appeared to be the main message from the Federal Reserve's snapshot of business activity throughout the country in late April and May that was released yesterday.

"The tone was one of modest but uneven growth, with some major sectors showing signs of improvement while others softened or remained weak," it reported.

Economists said the report, commonly referred to as the beige book, for the color of its cover, makes it all but certain that Fed policy-makers will leave short-term interest rates at 40-year lows unchanged at their meeting this month and probably through the summer.

"This report tells me there is very little momentum in either direction," said economist Clifford Waldman of Waldman Associates. "Consumer spending is holding up well enough not to have a double dip recession as feared some months ago. But nor do I see a V-shaped boom that some analysts were predicting."

Manufacturers hardest hit by the recession last year largely reported higher production levels, shipments and orders, but there were pockets of weakness, the Fed said in its survey.

Suppliers of aircraft parts in Boston and San Francisco said orders were down. Manufacturers in Philadelphia, Atlanta, Dallas and San Francisco said demand for telecommunications equipment remained weak. Deep cuts in capital spending by businesses was a key reason the economy fell into recession.

In a quarterly report assessing potential threats to the global economy, the International Monetary Fund (IMF) said yesterday that business investment remained the missing ingredient for a sustainable economic recovery in the United States and Europe.

The IMF said that the near-term outlook "appears largely free of imminent threats to global financial stability." But its economists warned that the failure of corporate profits to rebound was a threat because businesses will not increase spending in the critical area of capital investments until profits recover.

On Wall Street, a cautious mood dominated the session, but stocks moved higher. The Dow Jones Industrial Average gained 100.45 points to close at 9,617.71.

The Fed survey revealed retail sales were flat in most districts, hampered by unusually cool weather in some parts of the country. Automobile sales were mixed.

On the real-estate front, home sales generally remained robust, as low mortgage rates motivated buyers. But commercial properties continued to struggle, with most districts reporting high vacancy rates and lower rental rates.

The jobs market, meanwhile, was sluggish, though the Boston, Philadelphia, Richmond and Atlanta districts reported higher demand for temporary workers, an encouraging sign for future job growth.

The Fed survey is based on information collected before June 3 from the Fed's 12 regional bank districts. It will be used by Fed policy-makers when they meet on June 25 and June 26 to discuss interest rate policy.

"This report suggests the Fed will be able to sit on its hands at the June meeting," said economist Richard Yamarone of Argus Research Corp. "The Fed appreciates the recovery but has some reservations."

One of the reasons the Fed can afford to leave rates so low is because inflation has not been a problem. In the survey, the Fed said, "Price pressures were in check for most goods and services." But business contacts reported rising steel prices and continued increases in energy and insurance costs.

Earlier this month, Fed Chairman Alan Greenspan observed that America's economic prospects were looking brighter but cautioned that economic growth in the coming months will slow from the 5.6 percent posted in the January-March quarter.

Private economists are forecasting growth this quarter of 3 percent to 3.5 percent, a more moderate but still respectable pace.

One of Mr. Greenspan's biggest concern is how consumer spending, which accounts for two-thirds of all economic activity in the United States, will hold up during the recovery. Throughout the slump, consumers kept buying, meaning they will have less pent-up demand coming out of it.

Although the nation's unemployment rate dipped to 5.8 percent in May, many economists predict it will move higher this summer, an additional factor that might slow spending.

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