Economy expanded in first months without inflation Retail, property sales, manufacturing go up

March 13, 1997|By BLOOMBERG NEWS

WASHINGTON -- The U.S. economy barreled ahead in the opening months of this year without any evidence of accelerating inflation, the Federal Reserve said yesterday.

"Price pressures, such as those reported by most retail and manufacturing contacts, appear to have been temperate," the Fed said in one of its periodic regional economic outlooks. Job applicants were scarce in most parts of the country, the Fed said, though "wage gains generally remained positive."

The Fed's regional outlook, commonly known as the "beige book," is based on reports from the Fed's 12 district banks and is published eight times each year. The report will help form the basis for discussion on interest rate targets at the March 25 meeting of the Fed's policy-setting Federal Open Market Committee. The central bank's target for the interest rate on overnight loans between banks has remained at 5.25 percent since January 1996.

"This report reinforces my position" that the Fed won't raise rates in March, said Maury Harris, chief economist at PaineWebber Inc. in New York.

Retail sales ran higher than a year earlier in most parts of the VTC country, while manufacturing was running at high levels "with only pockets of weakness," the Fed said.

Residential and commercial real estate markets were also buoyant, though demand for business and consumer loans showed signs of slowing in many parts of the country. Though oil prices have fallen to about $20 a barrel from more than $25 a barrel in recent months, domestic drilling activity "has picked up noticeably."

Investors took little encouragement from the report. The benchmark 30-year Treasury fell about 3/8 , or $3.75 per $1,000 bond, raising its yield 3 basis points to 6.88 percent. The two-year note was little changed to yield 6.10 percent. Stocks fell, with the Dow Jones Industrial Average down 45.79 to 7,039.37.

What investors looked for in the report, in a word, is "labor, labor, labor," said Alan Day, vice president of the Stratevest Group, a subsidiary of BankNorth Group in Burlington, Vermont, which manages $1.7 billion in stocks and bonds.

Though the Fed suggested low unemployment has yet to translate into a full-blown case of rising inflation, the report contained some evidence of wage pressure.

In Dayton, Ohio, for example, unskilled workers are being offered $1 or more above the new federal minimum wage of $4.75, according to the Cleveland Fed. The Minneapolis Fed, meantime, reported "substantial pay increases for some computer and engineering specialists." High job turnover -- or "frequent job hopping" -- was reported in the West by the San Francisco Fed.

In his semiannual testimony to Congress, Fed Chairman Alan Greenspan last week said that while U.S. economic prospects "in general are quite favorable," the Fed may take pre-emptive action and raise the overnight bank lending rate to guard against the threat of accelerating inflation. He continued to express concern about rising labor costs.

The latest edition of the economic outlook was compiled by the Federal Reserve Bank of St. Louis. Information was collected before March 3.

When the Fed last raised the overnight bank lending rate target, at the FOMC meeting Jan. 31-Feb. 1, 1995, the beige book warned "price increases seemed somewhat more widespread than were in early December, while higher inflationary expectations were apparent in business surveys."

Pub Date: 3/13/97

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