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Fed survey backs reports of economic growth

| Thursday, July 31, 2003

WASHINGTON -- America's economy, which has been poking along, displayed fresh signs of gaining momentum in June and the first half of July, the Federal Reserve said Wednesday in its latest snapshot of U.S. business activity.

Most of the Fed's 12 districts that were surveyed suggested stronger growth in their regions. "Consistent with the generally more positive assessments of current economic activity, several districts noted increased optimism about economic prospects in coming months," the report said.

Three districts -- Chicago, St. Louis and San Francisco -- characterized economic activity as sluggish. Atlanta described business conditions as mixed.

The survey of business conditions will help Fed policy-makers when they meet Aug. 12 to set interest rates. The survey suggested the economy flashed more signs of life since April and May, the period covered in the Fed's previous survey.

Although that survey hinted that the economy was on the verge on a revival, the Fed decided to give the recovery a little push. Fed policy-makers on June 25 cut a key interest rate by one-quarter of a percentage point to 1 percent, a 45-year low.

But with scattered signs that the economy may be seeing better days ahead, analysts believe the Fed probably will hold short-term interest rates steady at next month's meeting.

"There are encouraging signs of improvement throughout many Fed districts. However, I still don't think the economy is going to see blockbuster growth" through the rest of the year, said economist Richard Yamarone of Argus Research Corp.

The survey added to evidence that the manufacturing sector, which has had the hardest time trying to recover from the 2001 recession, is turning a corner.

"Manufacturing activity edged higher in most districts, and Philadelphia and Richmond cited an end to the recent declines in production," the Fed report said.

Fed Chairman Alan Greenspan and private economists believe the sluggish economic will pick up speed in the second half of this year. President Bush's tax cuts along with near rock-bottom short-term interest rates should help out on that front, economists say.

Analysts believe the combination of lower borrowing costs and fatter paychecks and other tax incentives might spur consumers and businesses to spend and invest more.

Even if that turns out to be the case, the job market is likely to remain sluggish economists say. The unemployment rate hit a nine-year high of 6.4 percent in June. It could hover in that range and possibly move higher in the months ahead because job growth probably will not strong enough to handle an influx of people looking for work amid an improved climate, economists say.

The Fed's report said that housing sales remained strong across various districts, helped by low mortgage rates.

Rates have climbed recently, which is slowing home-mortgage refinancing activity and could dampen home sales a bit, economists say. Refinancing -- which has left people with extra cash -- has been a crucial factor supporting consumer spending, one of the main forces that has kept the economy afloat.

The Fed's survey said consumer spending remained "lackluster." Only New York "reported a noticeable improvement in retail sales," the Fed report said.

Consumer confidence as reported by the Conference Board declined in July, reflecting Americans' concerns about the stagnant job market. Against that backdrop, economists will be keeping a close eye on how consumers behave in the coming months.

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