24 October 2002, 09:15  U.S. Economy: Fed Says Economy, Retail Sales Weak

/www.bloomberg.com/ By Brendan Murray
Washington, Oct. 23 (Bloomberg) -- U.S. economic growth was slow entering the final quarter of the year because of flattening retail sales, stalled manufacturing and lackluster hiring, the Federal Reserve said.
``Most districts reported that economic activity remained sluggish in September and early October,'' the Fed said in its latest regional economic report card, known as the beige book. ``Retail sales were weak across the nation, including some declines in motor vehicle sales from very high levels.''
Fed officials in recent speeches have said they don't expect a pickup in the economy before next year. William Poole, president of the Federal Reserve Bank of St. Louis said today ``the overall economy is growing modestly, recovering all too slowly from last year's recession.''
Investors are betting that Fed policy makers may decide to reduce the benchmark overnight bank lending rate from its 41-year low of 1.75 percent when they meet in two weeks. The implied yield on the December federal funds futures contract fell 3 basis points to 1.63 percent today, 12 basis points below the current rate and suggesting about a 50-50 chance of a quarter-percentage-point cut.
Central bankers next meet Nov. 6. At their last meeting on Sept. 24, policy makers held rates steady and maintained their assessment that the risks to the recovery are weighted toward additional weakness, rather than excessive strength and inflation. Two of the 12 voting members of the Open Market Committee dissented in favor of a rate cut at that meeting.
Inflation `Stable'
Today's beige book reported signs of inflation were ``stable,'' although there were ``significant increases'' in the cost of health care, insurance and shipping.
Stores in the Fed's Cleveland, Minneapolis and Philadelphia districts noted ``weak retail sales,'' while retailers in Chicago, Dallas, Kansas City and San Francisco said sales growth had slowed, the Fed said in a report that covered developments up to Oct. 15.
Retail sales fell in September, previous government figures showed, and the threat of war and concern over a slowing economy pushed confidence down to a nine-year low, according to a University of Michigan survey. Sales fell 1.2 percent last month to $302.5 billion, as car, clothing and electronics purchases fell, the Commerce Department reported. It followed a 0.6 percent increase in August and was the biggest drop since November.
Manufacturing
For manufacturers, which have been struggling for almost two years, conditions remain ``tough, stagnant and sluggish,'' the Fed said today. Factories in Chicago reported weak demand for heavy equipment, the report said.
``Many districts reported reluctance of manufacturers to undertake capital spending,'' the Fed said.
Homebuilding and residential real estate activity was ``positive, although softening was noted in some regions and in the higher end of the market,'' the Fed said. Commercial real estate weakened, it said.
Builders broke ground on new homes at an annual pace of 1.843 million units last month, the highest since June 1986, the Commerce Department reported last week. That was up 13.3 percent from August's revised 1.627 million pace. Construction of single- family dwellings surged 18.2 percent to 1.477 million, the highest in almost 24 years.
Mortgage Rates
Mortgage rates, which are the lowest since at least 1971, are encouraging consumers to buy new homes. The average interest rate on a 30-year fixed mortgage dropped in September to 6.09 percent. The rate fell below 6 percent this month, the lowest since Freddie Mac, the No. 2 buyer of U.S. mortgages, started keeping records in 1971.
For workers, ``labor markets were lackluster, with only a few reports of increased hiring,'' and ``increases in wages were generally subdued, the beige book said.
The central bank has kept its target for overnight lending between banks at a 41-year low until growth accelerates. Fed policy makers will use the report to help decide the direction of interest rates at a meeting early next month.
The economy recovery is ``rather murky,'' Fed Governor Ben Bernanke said last week. ``The recovery is proceeding but it's not as strong as we had hoped or possibly expected some months ago and I think the issue is to what extent the slowness is due to concerns like geopolitical concerns and other issues that are essentially out of control of the Federal Reserve and to what extent there remains residual weakness beyond those.''
Fed Policy Meeting
The beige book was compiled by the Federal Reserve Bank of Minneapolis and was based on information collected before Oct. 15. The report -- a collection of anecdotes reported to the regional Fed banks from local businesses -- gives central bankers an idea of economic developments beyond what statistics show.
Earlier today, Fed Chairman Alan Greenspan said the trend of rising U.S. worker productivity may be here to stay. ``It is remarkable and encouraging that, despite all that has transpired over the past couple of years, a significant step-up in the growth of productivity appears to have persisted,'' Greenspan told a conference hosted by the Labor Department and the American Enterprise Institute.
Greenspan said 2002 will probably yield one of the largest gains in productivity of the past 30 years. No matter how the measurements are made, ``the same basic result is clearly evident: an impressive gain in output per hour over the past year,'' he said.
The Fed chairman made no comments about the course of the U.S. economy's recovery or the state of Fed monetary policy. Fed officials meet again on Nov. 6 to decide the level of interest rates.

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