--Poole says US econ could see a surprise on upside or downside
--Poole: Consensus Feb jobs gain would increase comfort on econ
--Poole says doesn't see inventory buildup as a "big problem"
--Poole says US inflation environment "well under control"
--Poole: Low inflation gives Fed more flexibility on policy
--Poole: US confidence not highly correlated with consumption

By Deborah Lagomarsino
New York, March 7 (BridgeNews) - St. Louis Federal Reserve Bank President William Poole said late Tuesday that "the worst may be over" for the U.S. economy and said a "consensus" reading on the February employmentreport due Friday would be consistent with that view and give him greater comfort about the economic outlook.
* * * "I have no reason to believe that the pessimists, who believe there might or will be a recession, have a strong case over the consensus view, which is slow growth and picking up towards the end of this year," Poole said in an interview with BridgeNews late Tuesday.
"Everything I know from anecdotal information is consistent with that picture" that the worst may be over for the U.S. economy, he said. Any number "in the neighborhood of the consensus best guess" in the February employment report would "increase comfort" about the economic outlookand "be consistent with the picture I've been spinning out here," Poole said.
If the February jobs report "confirms the rest of the picture that we already have, the pieces of the puzzle are fitting together," said Poole, who votes this year on monetary policy.
U.S. non-farm payrolls are expected to have climbed by 90,000 in February after January's mostly weather and seasonal-adjustment related 268,000 rise, according to a BridgeNews survey of economists.
Poole said the employment report is the first number the Fed gets, after the National Association of Purchasing Management survey, that has a "broad sweep" to it and covers the entire U.S. economy. In addition to the headline number, Poole said he'll be looking at the composition of the report and other areas such as hours worked and overtime. "If there are no anomalies, I'll regard it as a pretty solid number," Poole said.
Poole said he continues to view the recent Blue Chip forecast for 2.1% growth this year as "reasonable" and said he sees no indication that the U.S. economy is in recession.
"I do not see a lot of pessimism. I see people being wary perhaps, but I certainly think that most believe that the best guess is that things are picking up from here," Poole said.
"Strong residential housing and money growth picking up rather than sinking. These are atypical to recession," he added.
He acknowledged, however, that "we could have a surprise on the downside and we could also have a surprise on the upside." He said it looks like growth in the first quarter is going to be close to the fourth quarter's 1.1% and that the "prevailing view is that growth is going to pick up to about 3.5% by the end of this year or the first quarter of next year."
Poole indicated that he may be starting to question whether the risks to the U.S. economy remain on the downside. He said one of the issues the Federal Open Market Committee may need to discuss at its next meeting is exactly what that balance of risks statement means to avoid confusion about it in financial markets.
For example, Poole said that if the Fed again states that the risks are on the downside, would that mean the Fed expects the economy to "be weaker than where we are now" or would it mean "that we would be leveling off?"
"We're going to have to discuss what we want that statement to mean and there is no confusion about what it means," Poole said. For most of last year the Fed said it viewed the risks to the economy as weighted toward greater inflation, but then shifted its view in December and stated that the risks were weighted toward economic weakness. The Fed restated this view following its Jan. 3 intermeeting move and Jan. 30-31 policy meeting.
Asked about how he views the current inventory correction, Poole indicated that he wasn't greatly worried about it and did not expect it to be a much greater drag on the economy than it already has been.
"My impression is that inventories are not a big problem," Poole said. He said he is trying to keep the current inventory overhang in perspective and said what is currently going on is nothing compared to what is typically seen at the start of recessions.
"The sort of story we have today is nothing like that. It's a little out of line. It's the kind of thing that if final sales turn out to be moving along smartly, the inventory situation will take care of itself. It's not a big overhang," he added.
"It does not look to me that inventories are grossly out of line. They may be marginally out of line, but not grossly out of line" given what inventories have done in previous business cycles, he said. Some economists expressed concern Tuesday that the
larger-than-expected 0.7% jump in factory inventories in January, which was the biggest jump since October, indicated that producers will have to continue slashing output to bring inventories more in line with softer demand.
Also disconcerting for economists was the rise in the National Association for Purchasing Management's inventory index in February, which was the second straight monthly rise. Some viewed this as a signal that demand may be slowing faster than companies are able to scale back production.
But Poole did not seem distressed by this data, saying, "I did look at the stock market and it doesn't look as though it (the factory inventory number) changed the outlook for the equity market today." The inventory drawdown shaved half a percentage point from fourth-quarter growth, but most economists are hopeful the inventory correction will be completed in the first quarter, paving the way for a pick up in production in coming quarters.
"Inventories become a problem if sales turn out to be weak. If sales are strong you can very quickly sell your excess inventories," Poole said. Poole pointed to strength in the housing sector and auto sales as indications that consumer spending will continue to hold up, although it will be weaker this year than the 5% pace of recent years.
He said academic studies show that the consumer confidence indexes "are not highly correlated with short-run developments in consumption."