Fri, Jan 18, 2002 page21

• US Fed looks for rebound

  • BLOOMBERG
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  The US economy remained weak in the past two months with some signs it was beginning to rebound from the first recession in a decade, the Federal Reserve's latest survey of regional economic activity said.

  "While there are still indications of caution, there are also scattered reports of improvement," said the report, commonly known as the "beige book."

  The recession that began in March shows signs of ending by June, the report said, citing evidence gathered from the Fed's 12 regional banks. That may signal that Fed policy-makers are close to ending a yearlong series of reductions in the benchmark US interest rate.

  "Many districts indicate that their contacts believe a recovery will begin by midyear or earlier, but the timing and strength are uncertain," the report said.

  As a result, "that uncertainty has led some businesses to budget conservatively for the first quarter."

  Retail sales "picked up in late December and early January but for the period overall posted generally weak results," the report said.

  Consumers benefited from "aggressive promotions and unusually large discounting that reduced profit margins for retailers."

  Manufacturing "was weak or down in most reports, but showed signs of stabilizing or rebounding," the report said.

  In some areas manufacturers had "increases in new orders" during the period, the report said, but the employment situation "remained soft."

  "There are numerous reports of shrinking wage and benefit packages," it said, and some employee benefits have been cut.

  Housing "continued to hold up in most districts, although there were pockets of weakness" such as higher-price homes, the report said. The commercial real-estate markets "were softer" because of rising vacancy rates, it said.

  Prices were declining for most goods and services except security, health care and insurance, it said. Energy costs, though higher than a year earlier, fell during the period, and "firms have reduced or eliminated energy surcharges" in at least one region, it said.

  The beige book was compiled by the Fed Bank of Dallas and was based on information collected before Jan. 9. The report -- a collection of anecdotes reported to the regional Fed banks from businesses -- gives central bankers and idea of economic developments beyond what statistics show.

  The central bank's rate-setting Open Market Committee next meets on Jan. 29-30. At the last meeting, on Dec. 11, central bankers cut the benchmark overnight bank lending rate by a quarter percentage point to 1.75 percent, the lowest in 40 years.

  In their deliberations, Fed policy makers consult the beige book and other confidential documents on the economy and potential policy actions.

  Investors are betting there's about a 50-50 chance of an additional quarter-point cut at the end of the month, judging by trading in federal funds futures contracts. The fed funds future for February, tied directly to the next meeting, has an implied yield of 1.64 percent, 11 basis points below the current target rate. A Commerce Department report yesterday showed signs that consumers are helping limit the depth of the recession.

  Retail sales fell 0.1 percent last month, reflecting declines at auto dealers and cheaper gasoline, while business increased at electronics, department and furniture stores. Sales grew at an 11.3 percent annual rate in the fourth quarter, the strongest since the first three months of 2000.

  Better-than-expected sales at retailers suggest that consumers were optimistic enough to keep shopping.
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