Asian woes apply brakes Crisis overseas keeps growth, prices down, Fed report says

June gauge was brighter

Survey will help form basis of next review of interest rates

U.S. economy

August 06, 1998|By BLOOMBERG NEWS

WASHINGTON -- The crisis in Asia is applying the brakes to U.S. growth and putting pressure on manufacturers and retailers to hold down prices, the Federal Reserve said yesterday in its latest reading on the economy.

The Fed said retail sales in recent weeks fueled further economic expansion but that "labor shortages, shipping bottlenecks and continued weakness in East Asia were beginning to temper growth." That contrasts with the Fed's previous regional outlook report in mid-June, when it described the United States as enjoying an "excellent" combination of continued growth and low inflation.

Inflation is largely in check as "goods prices remained stable," the Fed said. Price concerns have passed through to retailers, the report said, suggesting that corporate profits are also threatened. "Manufacturers and retailers reportedly cannot sustain price increases in the current competitive environment," it said.

The Fed is "looking at Asia more closely and feeling its impact," while still acknowledging the domestic economy continues to lTC pack a potent punch, said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. That suggests that Fed policy-makers are unlikely to push borrowing costs up or down at their next meeting. "They don't know which way things are going to play out," Wesbury said.

The Fed's regional outlook -- commonly known as the beige book -- is based on reports from the Fed's 12 district banks. It is published eight times each year. The latest edition was compiled by the Federal Reserve Bank of San Francisco, whose region has been particularly attuned to trade with Asia, and shipping bottlenecks at ports and on rail lines. The information was collected before July 27.

The report will help form the basis for discussion on interest rate targets at the Aug. 18 meeting of the Fed's policy panel, the Federal Open Market Committee.

Retail sales have been in line with retailers' expectations, and inventories "generally were characterized as balanced," according to the report.

Elsewhere, the report said banks reported healthy loan demand and that credit for borrowers has been "generally accommodative." And it said strong sales of residential and commercial real estate is helping fuel construction gains.

The farm economy came under stress because of the crisis in Asia, and in some cases "price declines for some commodities have been so large that producers cannot cover costs," the Fed said.

Other evidence that business activity at U.S. companies outside manufacturing is slowing appeared in a separate report. The National Association of Purchasing Management's index of nonmanufacturing business activity index fell to 57.5 in July after dropping to 61.5 in June. A reading above 50 means business is expanding, and an index below 50 means business is contracting.

The new survey is a sister report to the NAPM's index on manufacturing, which investors use to gauge the direction of factory activity. The manufacturing survey covers about 30 percent of economic activity, and the nonmanufacturing report was designed to pick up the rest, the NAPM says.

"We're probably seeing the second-round impact" from Asia, said Rick Egelton, deputy chief economist for the Bank of Montreal and Harris Bank in Toronto. "The service sector is relatively immune" to the Asian crisis, "but it can't stay immune forever."

At its last policy session, June 30-July 1, the Fed's Open Market Committee left the overnight bank rate target unchanged at 5.50 percent. The Fed hasn't raised the so-called federal funds target since March 1997.

However, at a meeting in March, policy-makers voted to tilt toward raising the target if that is needed to combat the inflation threat.

Pub Date: 8/06/98

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