Federal Reserve Economic Report

Economic recovery picking up steam

10 of bank's 12 districts report `expanding activity'

October 16, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

The economic recovery picked up steam heading into fall with even the beleaguered manufacturing sector showing signs of strength, the Federal Reserve reported yesterday.

Ten of the central bank's 12 districts reported that "activity has been expanding," while Boston and Cleveland turned in "mixed but steady levels of economic activity," according to the Fed's Beige Book, a snapshot of economic conditions issued every six weeks.

Hurricane Isabel inflicted "limited damage" in the states in the Fed's Richmond District, which includes Maryland, Virginia, West Virginia, the Carolinas and the District of Columbia, and hardware stores, restaurants and grocery stores recorded brisk sales in the storm's aftermath.

The latest report, which looked at conditions from late August through Oct. 6, is "pretty bullish and optimistic," said Sung Won Sohn, chief economist at Minneapolis-based Wells Fargo & Co. "It looks like pretty much every sector of the economy is going forward in the right direction."

Michael Englund, chief economist at MMS International, a financial consulting firm in New York, said the Fed appears to be realizing the economy is healing. "They remain among the hardest to convince," Englund said. "We are seeing that they are giving up some ground and willing to concede a stronger economic outlook."

But some economists cautioned that a chief ingredient of recovery - job growth - remained elusive.

"Having picked up from the last report might not mean we have shaken the sluggishness that has characterized the past couple of years," said Carl R. Tannenbaum, chief economist at LaSalle/ABN AMRO Bank in Chicago. Missing from the report, Tannenbaum said, are jobs. Few companies are hiring and expanding their businesses. The report called the labor markets "slack, though there are modest signs of improvement in a number of districts."

"People without jobs typically don't spend a lot of money," Tannenbaum said. The lack of hiring, he said, "leaves open the question ... is that [rebound] artificial or is that real?"

Even with the lack of hiring, consumers continued to open their wallets, although car sales weakened. Several districts said that the Bush administration's tax rebates helped boost sales, and retailers said they were optimistic that this holiday season will be better than last year.

"Last year, we were dealing with the threat of war," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis. "The year before that we had concerns after 9/11. This potentially could be one of the years where we may not have a lot of the disturbing events and sales could be pretty good."

And manufacturing, which has seen 2.6 million jobs evaporate over the last three years, showed some gains. The Atlanta and Chicago districts reported strong orders for machine tools, a sign that manufacturers planned increased production, while semiconductor producers on the West Coast experienced increased demand.

"Manufacturing employment exhibited modest gains in some districts, but in most was stable or declining," according to the report. The Richmond district reported that manufacturing contracted in the period.

Residential real estate, which has sizzled, continues to be "robust," most districts reported.

"A few districts specify that the recent increase in mortgage rates appears to have had at most a limited impact on home sales," according to the report.

Some builders have had trouble getting plywood, which has risen in price in a number of districts along with lumber. The Fed also reported sharp price increases in cattle and steel, among other commodities.

Thayer said rising commodity prices is a sign the United States and other countries are starting to grow. "It looks like world demand is picking up," he said.

Tourism and travel also improved, the report said. New York and San Francisco districts reported an increase in international visitors. Boston, Minneapolis and Kansas City noted gains in business travel.

Despite the economy's pickup, economists said, they don't expect the Fed to raise interest rates when it meets Oct. 28.

"I think we are still talking about quite a few months before the Fed contemplates hiking interest rates," Sohn said.

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