Fed's Parry Says Economy Not in Recession
Thursday April 26, 12:05 pm Eastern Time
By Marjorie Olster
<<SANTA BARBARA, Calif. (Reuters) - Federal Reserve Bank of San Francisco President Robert Parry said on Thursday the U.S. economy was not in a recession but may be headed down a rocky road in the immediate future.
Using language that Fed watchers usually interpret as a signal that further interest rate cuts in the near term are likely, Parry said the Fed would continue to be ``especially alert'' in monitoring the U.S. economy.
``No doubt, the road now and immediately ahead may be rocky, given the fact that there are some downside risks,'' Parry said in a speech prepared for delivery to a group from the University of California at Santa Barbara. A text of the speech was made available to reporters in advance.
Until recently, Fed officials had almost unanimously been predicting an economic recovery in the second half of the year. But Parry sounded a little less upbeat on those prospects.
``By the latter half of this year, it seems likely that we'll see somewhat faster growth -- not up to our full potential perhaps -- but at a more respectable rate,'' he said.
Parry estimated the growth rate of the economy at this point to be a ``small positive,'' adding the Fed would get important information on Friday when the government releases its gross domestic product report for the first quarter.
U.S. growth slowed dramatically in the fourth quarter of last year and stayed very weak in the first months of 2001 after years of booming consumer spending and business investment and huge gains in stock markets.
The Fed has already lowered the short-term interest rates it controls aggressively this year, with four half-percentage point cuts in the overnight bank lending rate in four months.
Wall Street is widely anticipating another reduction on May 15 when the policy-setting Federal Open Market Committee (FOMC) next meets. Parry is not a voting FOMC member this year.
SPENDING STALLS
Parry said consumer and business spending may be ``taking a breather'' now after years of booming growth that left both groups saturated with new goods. A sharp drop in the stock market is also squeezing consumer and business spending.
Consumers loaded up on big-ticket items like cars in the past few years, Parry said. ``This may spell a slowdown in spending for a while.''
Likewise, businesses have large stocks of capital equipment already, suggesting there may be an ``overhang'' of equipment and software that could ``spell weakness in business spending for a time,'' he added.
On one bright note, Parry said technological advances that have helped businesses better manage their inventory levels may mitigate the extent of the slowdown.
Also, productivity growth has held up ``remarkably well'' in the slowdown, meaning the economy's potential for growth remains a good deal higher than previously thought.
``I'd say the underlying situation for the U.S. economy still has a lot going for it. For one thing, the Fed's easing will help,'' Parry said.
With layoffs mounting, Parry said he would expect the unemployment rate to rise about as much as it had in prior times of modest economic contraction.
As for the stock market, the steep declines seen over the past year were partly a result of Fed interest rate hikes from mid-1999 to mid-2000. ``But part of it also may be related to a reevaluation of the long-run profitability of many high-tech firms,'' Parry said.
He said he was confident the surge in technological innovation that propelled the economy since the middle of the last decade was not nearing an end. ``It's just that -- even with this boom -- markets may have gotten carried away.''
CALIFORNIA ECONOMY HOLDING UP
Parry said the California economy was slowing but appeared to be weathering the double blows of an energy crisis and a slump in the technology sector pretty well.
``Given the prominence of technology firms in California, we can expect to be hit harder than the rest of the U.S. as businesses work through these adjustments,'' he said.
If California has to resort to widespread blackouts in the summer due to an electricity crisis, it would have a ''measurable impact'' on the state's economy, he said.>> |
