Thursday, July 31, 2003

Fed sees economy perking up

By Jeannine Aversa
The Associated Press

WASHINGTON - America's economy, which has been poking along, displayed fresh signs of gaining momentum in June and the first half of July, the Federal Reserve said Wednesday in its latest snapshot of U.S. business activity.

Most of the Fed's 12 districts that were surveyed suggested stronger growth in their regions. "Consistent with the generally more positive assessments of current economic activity, several districts noted increased optimism about economic prospects in coming months," the report said.

A growing number of local companies reported increases in new orders and backlogs in July, according to a poll by National Association of Purchasing Management-Cincinnati.

About 42 percent of companies polled said new orders rose in July, compared with 33 percent in June. Likewise, 31 percent said backlogs grew in July, compared with 9 percent in July. Although indicators on production didn't show that kind of strength, a quarter of the companies reported in July they plan to increase employment, compared to just 14 percent in July.

The group's parent organization, the Institute for Supply Management, will issue its national report Friday.

John J. Byczkowski

Summaries prepared by the Federal Reserve to describe economic conditions in the Cleveland district, which includes Cincinnati:

"Contacts ... reported steady or improving conditions during June and the first few weeks of July. For the second consecutive report, manufacturers reported steady or improving production and sales. Residential home builders reported increased activity. ... Retailers and auto dealers are experiencing continued slow sales."

Three districts - Chicago, St. Louis and San Francisco - characterized economic activity as sluggish. Atlanta described business conditions as mixed.

The survey of business conditions will help Fed policy-makers when they meet Aug. 12 to set interest rates. The survey suggested that the economy flashed more signs of life since April and May, the period covered in the Fed's previous survey.

Although that survey hinted that the economy was on the verge of a revival, the Fed decided to give the recovery a little push. Fed policy-makers on June 25 cut a key interest rate by one-quarter of a percentage point to 1 percent, a 45-year low.

But with scattered signs that the economy might be seeing better days ahead, analysts think that the Fed probably will hold short-term interest rates steady at next month's meeting.

"There are encouraging signs of improvement throughout many Fed districts. However, I still don't think the economy is going to see blockbuster growth" through the rest of the year, said economist Richard Yamarone of Argus Research Corp.

The survey added to evidence that the manufacturing sector, which has had the hardest time trying to recover from the 2001 recession, is turning a corner.

"Manufacturing activity edged higher in most districts, and Philadelphia and Richmond cited an end to the recent declines in production," the Fed report said.

Fed Chairman Alan Greenspan and private economists think that the sluggish economy will pick up speed in the second half of this year. President Bush's tax cuts along with near rock-bottom short-term interest rates should help out on that front, economists say.

Analysts believe the combination of lower borrowing costs and fatter paychecks and other tax incentives might spur consumers and businesses to spend and invest more.

Even if that turns out to be the case, the job market is likely to remain sluggish, economists say. The unemployment rate hit a nine-year high of 6.4 percent in June. It could hover in that range and possibly move higher in the months ahead because job growth probably will not be strong enough to handle an influx of people looking for work amid an improved climate, economists say. The Fed's report said that housing sales remained strong across various districts, helped by low mortgage rates.

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