Chicago, April 24 (Bloomberg) -- The U.S. recovery will probably gain traction in the second half this year, aided by the lowest interest rates in 41 years and productivity gains, said Michael Moskow, president of the Federal Reserve Bank of Chicago. Recent economic data have pointed to ``widespread weakness'' in the labor market and a slowing in the pace of consumer spending, Moskow said. A ``climate of uncertainty'' since 2001 generated by the terrorist attacks, accounting scandals and the war in Iraq have also caused companies to hesitate in buying equipment and hiring workers. Still, Moskow said, ``the most likely outlook is that the economic expansion will regain momentum as the year progresses.'' He made the remarks in a speech at a Commonwealth Club luncheon in Chicago.
Fed policy makers held the benchmark overnight lending rate at 1.25 percent in March, counting on the lowest borrowing costs since the John F. Kennedy administration to propel the economy through a war with Iraq. At the time, they surprised investors by saying the pending war with Iraq made it impossible to assess the outlook for the U.S. economy. It was the first time the Fed declined to say whether the main risk was slow growth or inflation since 2000, when it began publishing such statements. In response to questions from reporters after the speech, Moskow declined to say whether the end of hostilities in Iraq would make it possible for policy makers to issue a risk statement after their next meeting, May 6. The implied yield on the fed funds futures contract for May suggests investors see little chance of a quarter-point rate cut at that meeting. `Anecdotal Information' ``Now that the fighting is over we are delighted to see, and we are starting to get, some anecdotal information about what's happening to the economy, but I would not want to speculate as to whether we will have enough information by May 6 to make a statement,'' Moskow said. ``We see in some cases some improvement in consumer confidence.'' In his speech Moskow said that low interest rates together with gains in productivity make it likely that the economy will improve in the second half of the year. ``The current low-inflation environment has allowed the Fed to maintain an accommodative monetary policy,'' said Moskow, who is a voting member of the Fed's interest-rate setting Federal Open Market Committee this year. ``It has given us room to take out some extra `insurance' against downside risks.'' Deflation shouldn't pose a threat to the recovery, Moskow added in response to a question after the speech. ``Do I think it's likely in the U.S.? No,'' he said. Still, he said the Fed is monitoring the overall level of prices and could buy longer-term government securities to counter an overall drop in prices.
Weak Data
Recent economic data, particularly in the labor market, have given economists reason to worry. Today, the Labor Department reported that the number of Americans filing new claims for state unemployment benefits unexpectedly rose last week to the highest in more than a year. Claims have held above 400,000 for 10 straight weeks, an indication of a weak job market. The government will probably report next week that the unemployment rate this month rose to 5.9 percent from March's 5.8 percent. The economy lost 108,000 jobs last month after shedding 357,000 the month before. Findings of the Federal Reserve's survey of regional economies reported yesterday showed manufacturing slowed and retail sales weakened in March as consumers turned cautious at the onset of war with Iraq. The so-called beige book is based on information the Fed's 12 regional banks collected before April 15 and includes the March 19 start of the war.
`Jobless Recovery'
``The current recovery resembles that following the 1990-91 recession, which we call the `Jobless Recovery,''' Moskow said. ``Signs of slowing activity in February were also apparent in national surveys of purchasing managers, both in the manufacturing sector and elsewhere, and these indicators deteriorated further in March.'' ``These indicators -- and the general failure of capital spending to keep pace with consumers' -- raise the concern that the veil of uncertainty has masked a more fundamental source of weakness in the business sector,'' Moskow said. ``If so, we could continue to have below-potential growth for an extended period of time.'' Higher productivity, which rose 4.8 percent last year, has led to increases in disposable incomes, fueling consumer purchases of houses and autos, he said. That Americans are still buying such items shows that they are confident in their ability to make future payments on them, he said.
First-Quarter Growth
The U.S. economy probably expanded in the first quarter at a 2.4 percent annual rate, a full percentage point faster than in the previous three months, based on the median estimate of 67 economists surveyed by Bloomberg News. The Commerce Department is to report the first-quarter statistics tomorrow. With the nation's trading partners already beset by economic weakness and consumer spending growing moderately, ``the major risk to the forecast going forward is the business sector -- their willingness to invest and hire people,'' Moskow said in response to a question after his speech. ``That's the swing factor here.'' The economy needs to grow at least a 3 percent rate to reduce unemployment, economists say. Growth averaged 3.6 percent a year during the country's record expansion from 1992 to 2000. The last time the economy grew 3 percent or more for two consecutive quarters was in the last six months of 1999.//www.bloomberg.com