~OT~...Top Financial News...FYI...
Wed, 22 Sep 1999, 9:59pm EDT
Fed Says U.S. Still Growing at 'Brisk' Pace, Consumer
Prices Mostly 'Calm'
By Michael McKee and John Cranford
<<Washington, Sept. 22 (Bloomberg) -- The U.S. economy is
expanding at a brisk pace with tight labor markets and few price
pressures, the Federal Reserve said, a combination that suggests
the central bank is unlikely to raise interest rates again next
month.
The Fed's latest regional economic survey -- commonly known
as the beige book -- cited rising retail sales and accelerating
business at the nation's factories as evidence the economy isn't
slowing much as the almost nine-year-old expansion stays on track
to set a record for longevity early next year.
''All district economies continue to exhibit overall
strength, with most experiencing moderate-to-brisk rates of
growth,' the Fed report said.
Consumer spending is strong, with most districts reporting
retail sales are up from their levels a year ago, the report
said. ''Retail sales are generally up in most districts,' the
Fed said. ''Industrial activity is on the rise in most parts of
the country, with orders and production both up.'
Even so, ''Price pressures at the consumer level remain
mostly calm,' the survey said. ''Where they are apparent, they
are categorized as temperate.'
Price pressures at the wholesale level, however, do appear
to be ''somewhat greater,' the Fed said, with ''numerous
districts reporting significant increases in some materials
prices' and manufacturers reporting higher raw material costs.
Demand for Labor
Around the country the demand for labor ''continues to
outstrip the readily available supply of labor in most areas,'
the report said. Retailers and manufacturers reported problems
finding workers, although ''several districts have noted a
slackening in the demand for labor,' it said.
In all, ''there are few reports of acceleration in nominal
wages and salaries,' the report said, although several banks
reported increases in the employer costs of health-care benefits.
The latest edition of the beige book was compiled by the
Federal Reserve Bank of St. Louis. Information was gathered
before Sept. 13.
Today's report will help form the basis for discussion on
the target interest rate on overnight loans between banks at the
Oct. 5 meeting of the Fed's policy-setting panel, the Federal
Open Market Committee.
''Wages and prices are the focus now,' said Marilyn Schaja,
an economist at Donaldson, Lufkin & Jenrette in New York, who
doesn't expect a rate increase next month. ''The Fed wants to see
whether companies are able to raise prices because they need to
offset higher wages.'
Last Fed Rate Increase
At its last meeting, Aug. 24, the FOMC voted to raise the
overnight bank lending rate by a quarter percentage point to 5.25
percent, the second increase in two months. The central bankers
at the time said that with global growth rebounding and U.S.
labor markets remaining very tight, the economy no longer needed
additional stimulus.
The increase in the federal funds rate ''should markedly
diminish the risk of rising inflation going forward,' the FOMC
members said in a statement.
U.S. Treasury bonds were little changed, with the 30-year
bond yielding 6.09 percent, after release of the beige book and a
separate report from the Treasury Department that the government
posted a $2.5 billion budget deficit in August. Stocks fell, with
the Dow Jones Industrial average closing down 74 points, or 0.70
percent, at 10,524.07.
''The money is in and the bets are down,' said Richard
Yamarone, senior economist at Argus Research Corp. in New York,
who expects the central bank to leave the overnight bank rate
unchanged at 5.25 percent on Oct. 5. This report ''will do little
to change the minds of Fed members.'
The August budget shortfall, which was smaller than expected
and less than the August 1998 deficit of $11.2 billion, leaves
the government on track to post a second consecutive annual
budget surplus for the fiscal year that ends Sept. 30. The
Treasury is expected to report a surplus of about $100 billion
this year, up from $70 billion in fiscal year 1998. That will be
the first back-to-back surpluses since 1956-57.
Rising Rates
Higher interest rates may be starting to have an impact. The
beige book reported ''some slowing has recently become apparent
in both sales and construction' of new homes around the country.
''Just about all districts cite higher mortgage rates as a
primary reason for the recent slowing,' it said.
Also contributing to a construction slowdown are labor and
material shortages ''which are delaying construction' in many
districts, the report said.
In spite of the drop in demand for mortgage and home-
refinance loans, ''lending activity remains strong,' the report
said. Some of that may be going for new cars. Vehicle sales
''remain robust' with some dealers ''unable to meet demand for
popular models,' the report said.
The report said drought conditions in the East and parts of
the Midwest were reported to be a problem. Hurricane Floyd,
however, flooded much agricultural land in the East after the
report was prepared, and a Fed spokesman called news agencies to
say the language on the drought should be disregarded.
Productivity
The Fed's regional outlook is based on reports from the
Fed's 12 district banks, and is published eight times each year.
The job of collating and writing the beige book report is
randomly rotated among the Fed 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 banks' 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.
The beige book did not mention what may be the key factor in
FOMC decision-making: productivity gains that should allow the
U.S. economy to keep growing with low inflation. Several Federal
Reserve policymakers suggested yesterday that with productivity
rising, they aren't leaning toward a third straight interest-rate
increase next month.
''We're becoming more convinced that we're in the midst of a
pickup' in productivity, Federal Reserve Bank of San Francisco
President Robert Parry said in a San Jose, California, speech.
Marvelous Run
U.S. worker productivity has risen at an average annual rate
of more than 2.7 percent since mid-1998, faster than the 1
percent average of the previous two decades.
Separately, Fed Governor Roger Ferguson said in Pittsburgh,
Pennsylvania, that he expects productivity -- a measure of worker
output for hour -- could consistently stay above 2 percent, more
than double the rate of the 1980s though the mid-1990s.
While ''labor markets are really quite tight,' Ferguson
said that the risks to the economy ''are relatively evenly
balanced at this stage.' That suggests he doesn't see an
immediate need to raise interest rates to slow the economy as a
way of keeping inflation from inflation from accelerating.
And William Poole, whose St. Louis bank prepared today's
report, said as a result of productivity gains ''companies are
able to make the goods, pay the wages without it feeding through
to price pressures' -- keeping inflation in check.
Poole, in comments to reporters after a New York speech,
said he expects the U.S. economy -- headed for a record expansion
early next year -- to stay on its path of strong growth and tame
inflation for some time. "The economy has had a marvelous run,"
Poole said. "I don't see obvious evidence that it's not going to
continue.">>
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