Headline: Economy Has Barely Grown: Fed Survey Finds Weakness in Nearly Every Sector

Source: Washington Post, Thursday, June 14, 2001; Page E01

URL: http://washingtonpost.com/wp-dyn/articles/A63085-2001Jun13.html

Over the past two months, the U.S. economy was barely growing, with weakness reported in virtually every sector except drilling for oil and gas, according to the Federal Reserve's latest nationwide survey.

"Economic activity was little changed or decelerating," said the summary of the survey released yesterday. It then ticked off the sectors one by one:

• Retail sales and tourism have been slow to flat across the nation.

• Most of the 13 Federal Reserve bank districts report that manufacturing has declined or remained weak.

• Commercial real estate markets have softened. New construction, while still at high levels in a number of districts, appears to have leveled off.

• The agricultural sector has been hurt by adverse growing conditions and higher costs.

• Mining activity is stagnant.

Given all that, layoffs have increased and previously tight labor markets "continue to ease in all districts" while wage and price increases remain moderate, except in energy and health care, the survey summary said.

The survey -- with its findings published in the "beige book," known for the color of its cover -- is prepared eight times a year for use at a Fed policymaking session. In this case, the central bank's top policymaking group, the Federal Open Market Committee, meets June 26 and 27, when it is widely expected to reduce interest rates again to encourage economic growth. The FOMC has cut its target for short-term rates five times, by half a percentage point each time, since the beginning of the year. After such aggressive action, most investors and analysts are looking for a quarter-point cut this month.

Economic conditions in the Richmond Federal Reserve Bank's district, which includes the Washington-Baltimore region, were similar to those in other parts of the country. The Richmond district's economy "grew slightly" since the last survey in March "as growth in services and housing was offset by weakness in retail and manufacturing," the report said. "Wet and cool weather along with softening consumer confidence hindered retail sales during May. Revenue growth at services firms outside of retail, however, rose at a moderate rate in recent weeks. Manufacturing shipments and new orders were off sharply."

The first point on the survey summary's list of weaknesses, retail sales, was confirmed yesterday by the Commerce Department, which said national retail and food-service sales rose only 0.1 percent last month. But the department also revised upward its figures for April as it shifted to a new approach for estimating sales at places Americans shop and eat. The revision means that the May sales level was higher than expected. On the new basis, April retail sales are estimated to have increased 1.4 percent, compared with the 0.7 percent gain reported last month using the old system.

Nonetheless, consumers are far more cautious in their spending than they were last year, a key reason the U.S. economy has been growing at only about a 1 percent annual rate for several quarters. Consumer confidence appears to have leveled off after falling sharply since last fall. Nevertheless, many analysts and policymakers remain concerned that consumers could decide to cut back on their purchases -- perhaps as a result of rising job losses -- to the point that it could tip the economy into a recession.

"The May numbers show gains in most sectors except apparel, which was down 1 percent, and general merchandise, down 1.3 percent," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y. "Higher gas prices lifted gas station sales by 1.4 percent, less than we had expected. The trend rate of growth in sales seems to have leveled off in recent months, but the early signs for June are weak, and it is too soon to say the worst is over," Shepherdson said.

Economist Stan Shipley at Merrill Lynch & Co. in New York said the April and May sales taken together suggest that "second-quarter consumer spending should climb at around a 2 percent annual rate and offset expected declines in capital spending."

If that turns out to be the case, the overall economy would show a small gain for the quarter and stave off for now any recession. In yesterday's report, Commerce said retail sales, excluding cars and light-truck purchases, rose 0.3 percent in May. Sales of such new vehicles fell 0.7 percent. But the April increase in vehicle sales, originally put at 1 percent, were revised upward under the new industry classification system to show a 2.3 percent gain.

The updated format is based on new system for classifying industries in the United States, Canada and Mexico called the North American Industry Classification System. It replaces a much older system, the Standard Industrial Classification, which was created when heavy industries such as automobiles, steel and railroads were dominated the U.S. economy.

Meanwhile, the Labor Department said prices of imported goods rose 0.3 percent last month after falling 0.6 percent in April and declining 1.5 percent in March. But in both March and April, prices for imported oil and refined products were falling and last month they jumped 5.5 percent. Excluding volatile petroleum prices, the department's index of import prices was down 0.2 percent in May, the fourth consecutive monthly decline.

-- Andre Weltman (aweltman@state.pa.us), June 14, 2001