http://www.forbes.com/newswire/2001/08/08/rtr323705.html

Link

Fed says US economy still sluggish in summer

Reuters, 08.08.01, 4:56 PM ET

By Jonathan Nicholson

WASHINGTON (Reuters) - The U.S. economy remained sluggish in June and July, as the recent slide in the manufacturing sector began to infect other areas of the economy, the Federal Reserve said Wednesday.

"Reports from most Federal Reserve districts point to slow growth or lateral movement in economic activity in June and July," the Fed said in its anecdotal survey of national economic conditions, also known as the "beige book."

Weakness in the factory sector was seen in almost all regions, the central bank said. "Sustained weakness in the manufacturing sector spilled over to other businesses, with many districts indicating declines in demand for office space and trucking and shipping services," the Fed said.

The grim tone of the report sent U.S. Treasury bonds aloft and added to negative sentiment in the stock market. The Dow Jones industrial average ended the day down 165.24 points, while the Nasdaq composite fell 61.43 points, putting it once again below the 2000 barrier.

SEEN CONFIRMING EASING

The report, compiled by the Federal Reserve Bank of San Francisco based on information gathered before July 30, will be used by the policy-setting Federal Open Market Committee when it next meets to set interest rates on Aug. 21.

Policymakers are widely expected to cut interest rates for a seventh time this year in an attempt to prop up a shaky U.S. economy. The Fed has already cut rates by a total of 2.75 percentage points this year.

Analysts said the generally grim tone of the report lent support to the idea of further rate easing ahead.

"It confirms the notion that the economy was weak headed into the third quarter," said Richard Berner, chief economist with Morgan Stanley in New York.

"This beige book contains anecdotal evidence with official government statistics that reveal economic weakness and points to a 25 basis point cut on August 21," said Mickey Levy, chief economist with Banc of America Securities in New York.

Some of the report's bleakest anecdotal detail dealt with the factory sector, which has borne the brunt of the economic slowdown this year. In July, manufacturing shed 49,000 workers, and has lost 837,000 jobs in the last 12 months.

"Reports of reduced work hours, lost overtime, forced furloughs, planned shutdowns, and layoffs were pervasive," the report said, noting specific weakness in clothing, computers, semiconductors, steel and telecommunications gear production.

"In addition to conditions in the domestic economy, districts attributed the current malaise in manufacturing to softening international demand for U.S. goods -- particularly in Europe and Asia," the report said.

RETAILER PESSIMISM

Retail sales were also reported as "sluggish" and frequently below expectations during the survey period, despite discounts aimed at luring shoppers to stores.

Some retailers asked manufacturers to warehouse goods until existing inventories had been sold and the pessimistic retailing mood also showed up in the form of lower back-to-school and Christmas orders, the Fed said.

The continued weakness in the economy did, however, have a brighter side in the form of reduced price pressures.

"Continued slow economic growth loosened labor markets and eased wage pressures in most Districts in June and July, but rising benefit costs continued to add to compensation costs," the Fed said. Employers were looking at ways to trim those benefit expenses, with the Kansas City Fed noting some area firms were looking at ways to cut free parking and health club perks.

Falling input costs and stiff competition have also kept consumer-level prices in check, the report said.

Copyright 2001, Reuters News Service.

-- (M@rket.trends), August 09, 2001