U.S. Economy Is Still Expanding, Inflation Mostly Well-Behaved, Fed Says
Lee:
How'bout that,couldn't have asked for more.
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By Vince Golle
(U.S. Economy Strong, Inflation Mostly Well-Behaved (Update1)
(Adds 3rd, 4th paragraphs on inflation, analyst's quote in
5th paragraph, and details on labor demand in 8-10 paragraphs.)
Washington, June 16 (Bloomberg) -- The U.S. economy is picking up speed and, while inflation is mostly ''well-behaved,'' there are signs of rising prices for some goods, the Federal Reserve's latest regional survey shows.
''The U.S. economy remains strong, with gains in activity widespread,'' according to the report, based on information from the Fed's 12 district banks. ''Retail activity in most districts has shown little sign of slowing, and consumers remain upbeat about the economy.''
That optimism means some consumers are willing to pay more for goods and services, the Fed said. ''Prices remain generally subdued, but many districts report pockets of higher prices'' for certain goods, the Fed survey said.
Plus, there's growing demand for labor in every corner of the economy -- from skilled tradesman to professionals to temporary workers. ''Labor markets remain very tight in almost all districts, with increased reports of upward pressure on wages in many parts of the country,'' the Fed said.
Indications of higher inflation and few signs of cooling in the economy could persuade Fed policy-makers to raise interest rates later this month. ''I'd put a lot of money on a rate hike,'' said Richard Yamarone, a senior economist at Argus Research Corp. in New York. In terms of the outlook for higher inflation, ''this is one of the strongest beige books I've seen in a long time.''
Used by Fed
The Fed survey -- 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 Kansas City. Information was gathered before June 7.
The report will help form the basis for discussion on interest-rate targets at the June 29-30 meeting of the Fed's policy panel, the Federal Open Market Committee.
While the Fed's report indicated consumer ''prices remain generally subdued,'' it also showed prices are starting to rise in some parts of the country. In the Kansas City area, for instance, retail prices are moving higher. What's more, in and around Chicago, ''consumer resistance to price increases has softened somewhat,'' the Fed said.
That's because unemployment is at a 29-year low and incomes are rising. Demand for labor is especially high in the construction industry. It's so strong that builders in Duluth, Minnesota, had ''imported 200 trade workers due to the lack of available local workers,'' the Fed's report said.
Luring Workers
Employers are also using new ways of finding and attracting workers. In the Atlanta area, employers are using more bonuses and incentives, allowing employees to work from home and hiring more part-time help to meet demand for both goods and services, the Fed said.
The report cited robust demand for home furnishings and autos in April and May. Production of electronics, machinery, heavy trucks and construction equipment have been ''especially strong,'' the report said. Lending activity remains strong, even though home refinancings have slowed because of a rise in mortgage rates.
''Demand in the U.S. is strong. I don't think there's any question about that,'' said Gary Stern, president of the Federal Reserve Bank of Minneapolis, last week in New York.
The latest Fed summary of the economy comes as many investors expect policy-makers to raise interest rates later this month. The yield on the July federal funds futures contract, an indicator of expectations for future Fed interest rate actions, is at 4.99 percent.
The current Fed target for the overnight bank lending rate is 4.75 percent. At the last meeting of the Federal Open Market Committee on May 19, policy-makers adopted a tilt -- or bias -- toward raising interest rates to cool the economy and restrain inflation.
4.1 Percent Growth
Expectations for higher interest rates are based on unrelenting strength in the U.S. economy and the prospect of higher inflation. In the first quarter, the economy grew at a 4.1 percent annual pace, buoyed by the strongest rate of consumer spending in 11 years, according to Commerce Department statistics.
Inflation concerns intensified after the Labor Department said last month that consumer prices in April rose at their fastest pace in almost nine years. That concern subsided somewhat after the Labor Department said today that prices were unchanged in May, and up just 0.1 percent when food and energy prices are excluded.
U.S. Treasury bonds rose after the release of the CPI report today, driving 30-year yields down 3 basis points to 6.08 percent. Stocks also rallied, lifting the Dow Jones Industrial Average 1.5 percent, and the Nasdaq Composite Index 3.4 percent.
Still, gains were limited as some investors were reluctant to place big bets before a speech by Fed Chairman Alan Greenspan tomorrow.
Fed Expectations
In its semiannual economic forecast on Feb. 23, the Fed said the U.S. economy will probably grow at a slower pace this year and inflation will accelerate.
The economy will grow at a 2.5 percent to 3 percent inflation-adjusted pace, the Fed said. The central bank forecasts measure growth between the fourth quarter of 1998 and the fourth quarter of 1999 and reflect the ''central tendency'' of the central bank's six current governors and 12 district bank presidents.
As for inflation, the Fed expects the consumer price index to rise by 2 percent to 2.5 percent this year. Last year, the CPI rose 1.6 percent, the slowest rate since 1986.
In addition, the central bank expects the unemployment rate to stay close to its current level throughout the next two years, ranging between 4.25 percent and 4.5 percent. The jobless rate was 4.2 percent in May, and averaged 4.5 percent last year, the lowest level since 1969.
The job of collating and writing the report is randomly rotated among the Fed's 12 regional banks. The identity of that bank is kept confidential until release time. The research director of the district bank in charge of compiling the latest edition writes a summary based on the other bank's reports.
In its deliberations, the FOMC -- which meets eight times a year -- consults internal and confidential documents on economic activity and potential policy actions, in addition to the beige book.
By changing the interest rates it controls, the Fed's actions translate into lower or higher borrowing costs on everything from credit cards to mortgages and business loans -- and directly influence economic activity, though often with a lag of many months. |
