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To: 2MAR$ who wrote (43)	5/1/2001 7:06:20 PM
From: 2MAR$	Read Replies (1) \| Respond to of 208838

Fed's Beebe sees modest U.S. pickup in growth By Marjorie Olster SAN FRANCISCO, May 1 (Reuters) - A prolonged slump in business investment or a cutback in consumer spending pose the greatest risks to a U.S. economic rebound later this year, an official at the Federal Reserve Bank of San Francisco said. Jack Beebe, the top economist at the San Francisco Fed after bank President Robert Parry, said he is concerned that with the official U.S. savings rate still negative, the economy slowing and layoffs mounting, Americans may start to sock away more cash in savings accounts. Though saving money is not a bad thing, it could depress consumer spending, which accounts for two-thirds of all U.S. economic activity, and hold back a recovery. "I think the big risk is will the capital spending lull get drawn out, and the second risk is will consumer spending continue to go along in this environment with such a low savings rate?" Beebe told Reuters in an interview. The Fed has aggressively cut the benchmark overnight bank lending or federal funds rate by 2.0 percentage points since the beginning of the year in the face of a sharp deceleration in economic growth. The slowdown has been felt mainly in manufacturing and business spending on capital goods. Beebe, senior vice president and director of research at the Fed bank which oversees the western United States, is one of the senior staff members permitted to sit in on Washington meetings of the Fed's policy-setting body, the Federal Open Market Committee (FOMC). Beebe said the Fed's surprise rate cut two weeks ago was motivated more by a feeling that the level of interest rates was not appropriate for the degree of economic weakness than by any specific new information on the slowdown. "It was not done out of urgency. I think that the federal funds rate just seemed a bit high for the current economic environment," he said of the April 18 decision to cut rates between scheduled meetings. The funds rate was lowered by half a point to 4.5 percent. REBOUND TOO STRONG A WORD A few months ago, Fed officials were confidently predicting a quick rebound in growth in the second half of the year. But San Francisco Fed President Parry told reporters last week: "The turnaround probably has been delayed somewhat." Beebe said he currently expects a small acceleration in growth later this year with inflation holding steady. "Our staff forecast is for growth of 2.25-2.5 percent in the second half. Rebound is a pretty strong word for that," he said. "It hinges on a modest pickup in capital spending and consumer spending at about 2.25 percent. That is a pretty modest pickup." Last week, the government estimated gross domestic product grew at a 2.0 percent annual rate in the January-March period, a slow pace but stronger than what markets had expected. Beebe said one of the concerns uppermost in his mind regarding the economic outlook is the strength of consumer spending in the second half of the year. "As a staff we have been looking at this" in preparation for the next FOMC meeting on May 15, he said. "The calculated saving rate is still negative. If people try to cut back on spending in order to get their income and spending more in balance to raise this saving rate, then you could get a slower second half coming from the consumer." U.S. incomes rose faster than spending for the second straight month in March, government data on Monday showed. The U.S. personal savings rate, which has plummeted over the past decade, remained negative in March at -0.8 percent. But economists say this data may underestimate actual savings due to technicalities such as how capital gains are measured. Consumer spending, while weaker over the past year, has actually been a stabilizing force in the economy throughout the slowdown, Beebe said. Rate cuts have had a big impact on housing, which has remained strong throughout the slowdown, and should prop up consumer spending, he said. "We are counting on those to bring consumer spending back slowly in our forecast." Lower rates can also encourage business spending by boosting confidence and lowering the cost of capital, he said. TIMING INFLUENCED LAST CUT The Fed's most recent rate cut was influenced by recent data that underscored the weakness in capital spending plans and by timing -- an unusually long period of time between the March 20 and May 15 FOMC meetings, Beebe said. But primarily, Beebe said the funds rate seemed out of sync with current economic conditions. "The meeting really represented the fact that the news was not turning positive and the capital investment news was probably a little more negative than it had been at the March meeting. But overall the issue was getting the funds rate down," Beebe said. The Fed based its concerns over capital spending mainly on what companies were saying in their earnings announcements. "We do listen," Beebe said. "At times like this, we listen very carefully to what we are hearing out there because it tends to lead the data." ((U.S. Financial Markets Desk, 212-859-1845)) REUTERS * end of story *