- The Washington Times - Wednesday, July 30, 2003

Yesterday, in the first official peek at the U.S. economy since the third quarter began on July 1, the Federal Reserve published its Beige Book, which reviewed economic activity throughout its 12 districts from the beginning of June through the middle of July. Recalling Fed Chairman Alan Greenspan’s notable observation in November that the economy had hit a “soft patch,” business-cycle observers will take note of the optimistic assessment the Fed issued yesterday. Indeed, several districts “noted increased optimism about economic prospects in coming months.” And nine of the 12 districts “were optimistic” about the manufacturing sector’s prospects over the next six months. Whether optimism will turn into reality is a different matter.

Since last winter’s “soft patch,” the pace of economic activity “increased a notch during June and the first half of July,” the Fed reported. There is, of course, no official growth rate that corresponds to an “increased … notch.” But most economists believe that the economy must grow by more than 3.2 percent in order to push down the unemployment rate, which hit a nine-year high of 6.4 percent in June.

There were telltale signs in the Beige Book indicating that the Fed’s optimism was more wishful thinking than probable fact. For all the optimism noted in the report, it must have been less than reassuring for the Fed to learn on Tuesday that consumer confidence, according to the Conference Board, had dipped in July to its lowest level since the months just before the war with Iraq. Forecasters were expecting an increase in the consumer-confidence index, which actually sank from 83.5 in June to 76.6 in July.

The dip may explain why the Fed had found that “consumer spending remained lackluster.” With consumer expenditures accounting for as much as 70 percent of gross domestic product in recent quarters, any evidence of “lackluster” consumer spending can hardly portend accelerating economic growth. The Fed reported that housing sales and starts “remained strong across districts,” but the recent jump in mortgage rates may begin to dampen what has been one of the economy’s strongest sectors over the past several years.

The Fed also observed “nascent signs of a recovery emerg[ing] in the manufacturing sector.” Frankly, that doesn’t have the sound of an imminently rapid expansion. If “nascent signs” sounds as equivocating as the perceived increased “notch” in the pace of economic activity, it may be because the Fed next reported that “capital expenditures in the manufacturing sector remained weak.” And why shouldn’t they? With the Fed reporting earlier this month that manufacturing was operating well below 75 percent of capacity in June, why would anyone expect capital expenditures to be anything but “weak,” especially when the Beige Book reported that “prices of manufactured products remained soft”?

A “nascent recovery” in manufacturing and “lackluster” consumer spending do not conform to the Fed’s implied annual-growth-rate projection of 3.8 percent for the second half of 2003. If the economy’s growth rate once again falls significantly below the Fed’s forecast, unemployment will almost certainly continue to increase. That development would further erode consumer confidence and perhaps lead to a situation when “lackluster” consumer spending will be remembered as “the good old days.”


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