Fed's Moskow Says Economy Will Gain Momentum in 2002
(Update2)
01/14 17:26
By Brendan Murray and Andrew Ward
Chicago, Jan. 14 (Bloomberg) -- The U.S. economy will gather momentum and recover later this year as companies boost spending to replenish inventories, said Michael Moskow, president of the Federal Reserve Bank of Chicago.
While the recession that began in March will end this year, ``the signs are still preliminary and the timing uncertain,'' Moskow told a business group in Chicago. ``The natural forces for recovery will eventually lift capital spending and inventory investment.''
Inventories are low, government spending will increase and the economy probably will benefit from ``moderate gains'' in spending on household items, Moskow said. A decline in business investment may be ending, though many firms still are skittish about buying new equipment, he said.
The recovery is likely to be gradual ``with activity gaining momentum as we move through the year,'' Moskow said. ``We have already seen some scattered signs of improvement, although the data are mixed.''
Moskow is a non-voting member of the Fed's policy-setting Open Market Committee, which is scheduled to meet next on Jan. 30. His comments suggest Moskow may agree with Fed Chairman Alan Greenspan, who said in a speech Friday in San Francisco, that the economy faces ``significant risks in the near term.'' It's premature to conclude that the downturn is over, Greenspan said.
Treasury Yields
The yield on the 5 percent Treasury note that matures in August 2011 rose a basis point today following Moskow's remarks and those of other Fed officials. The note's yield fell 11 basis points Friday after Greenspan's comments suggested that Fed officials may lower interest rates at the end of the month.
``The pattern of recovery is difficult to know at this time, but we anticipate that activity in the second half of the year will be better than the first half,'' Moskow said.
Three other Fed officials today joined Moskow with conditional outlooks for a rebound this year.
The consensus among economists is for recovery ``in about the middle of the year, which is a very nice hedge, so they don't have to say the second or third quarter,'' said Fed Bank of New York President William McDonough in a speech.
``There's a difference of opinion as to whether the recovery will be sort of strong, fairly strong, or very strong,'' McDonough said at the Institute of International Bankers. ``The fact is, I don't know the answer to that question, either.''
The difficulty is know what will propel the recovery, he said. ``In order to come out the recession, if the consumer can't lead the way we need business fixed investment to come back,'' McDonough said.
Concerns About Business Spending
Cathy Minehan, president of the Fed Bank of Boston, said in Manchester, New Hampshire, that ``the real question is whether the consumer will stay the course long enough to revive business investment.''
Gary Stern, president of the Fed Bank of Minneapolis, said consumer spending will pace a return to growth in the second quarter. The rebound ``may not be generally recognized before the third quarter,'' he said. ``My guess is that it will take a little time before people become convinced about the economy.''
He added that a revival of business investment in plant and equipment ``might be some time off,'' adding that the ``prognosis is difficult to pin down.''
Fed policy makers cut the benchmark overnight bank lending rate 11 times since the beginning of last year to a 40-year low of 1.75 percent.
While declining to predict the timing of a rebound, Moskow said the Fed's rate cuts would eventually benefit the economy. ``There is a good deal of monetary stimulus in the pipeline,'' he said, a comment echoed by McDonough today and others.
Inventory Investment
Production in the U.S. may be poised to rise after falling demand in 2000 and 2001 left companies with excess inventories, he said. Manufacturers cut production, helping tip the economy into recession.
``Inventory stocks probably are lean enough that firms will no longer be able to maintain the recent pace of liquidation and still keep up with demand,'' he said. ``Accordingly, inventory investment will likely turn from a negative factor to a source of growth for production.''
The economy fell into recession in March and contracted at a 1.3 percent annual rate in the third quarter of last year. It will probably grow at a 0.7 percent pace in the first three months of this year after contracting at a 1 percent rate in the fourth quarter, according to the January Blue Chip Economic Indicators survey of more than 50 economists.
For consumers, Moskow said he expects ``moderate gains'' in spending on household purchases. Low inflation, tax cuts, falling energy prices and wage increases have helped support real income growth, and consumer confidence is improving, he said.
Unemployment May Impede Recovery
One potential drag on a recovery may be higher unemployment, Moskow said. The jobless rate rose to 5.8 percent in December, the highest in more than 6 1/2 years, and companies shed the largest number of workers last year since 1982.
``If this cycle is like previous ones, unemployment rates may continue to rise for a time even after the recovery has begun to take hold,'' Moskow said. ``Resulting income losses then would likely hold down spending somewhat.''
For businesses, the picture isn't so clear, Moskow said. Firms ``remain relatively risk averse,'' which could ``continue to weigh on discretionary spending and capital outlays,'' he said.
``Nevertheless, recent orders data suggest that the contraction in business spending is at least moderating,'' he said. ``Even if business investment simply stops falling, this would be a significant improvement relative to the large declines of 2001.''
Productivity
In the Midwest, some manufacturers' business isn't deteriorating as rapidly as it did last year, he said. ``They may be bottoming out in some areas,'' he told reporters after the speech. ``These anecdotes are encouraging, but they are by no means definitive'' in showing a recovery is under way, he said.
Moskow told reporters that once the recovery gets under way, he expects worker productivity to return to 2 percent at an annual pace. Productivity grew in the third quarter at a 1.5 percent annual rate.
A strong rate of productivity in the U.S. is one reason the euro probably won't replace the dollar as the world's reserve currency, Moskow said.
``If you look at the stability of our political system, it's very high. If you look at our productivity, it's the highest in the world,'' he said in response to a question from the audience. `` When people look at the U.S. as a place to invest or a place to hold our currency, they view it as very positive and I don't see that changing in the foreseeable future.'' |
