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Fed: Economy expanding into the summer

The economy headed into the summer with better momentum, propelled by a manufacturing rebound and consumers who eagerly went shopping and sightseeing despite high gas prices.
/ Source: The Associated Press

The economy headed into the summer with better momentum, propelled by a manufacturing rebound and consumers who eagerly went shopping and sightseeing despite high gas prices.

This picture of the economy, released Wednesday by the Federal Reserve, seemed brighter in terms of prospects for overall economic growth. Factory production was up in a majority of districts, an improvement from the previous survey that found manufacturing was slow in most Fed districts.

Consumer spending and retail sales across the country generally were up too, with luxury goods selling better than lower-end merchandise in some areas. Travel and tourism remained healthy but there was little change in auto sales.

A separate report from the Commerce Department showed sales at the nation’s retailers in May posted their biggest gain in 16 months.

Information from the Fed survey will figure into discussions at the central bank’s next meeting on June 27-28. Economists predict the Fed will again hold a key interest rate at 5.25 percent, where it has stood for a year.

“The economy is accelerating, although there are some weak pockets. And inflation for the most part seems to be contained despite high energy prices. This survey supports the Fed sitting sidelined over the foreseeable future,” predicted Richard Yamarone, economist at Argus Research.

As the economy has recently flashed signs of emerging from a nearly yearlong sluggish spell, the chances of Wall Street’s hoped-for rate cut have faded.

Economic growth nearly stalled in the first three months of this year, registering a pace of just 0.6 percent, the worst in more than four years. Federal Reserve Chairman Ben Bernanke and other economists predict a rebound. Estimates range from a pace of 2.3 percent to more than 3 percent in the current April-to-June quarter.

Businesses, which clamped down in the first quarter, are expected to regain their appetites to spend and invest, leading the way for the anticipated bounceback in overall economic activity. Consumers, whose spending in the first quarter prevented the economy from stalling out, are expected to be somewhat more subdued, however.

On the inflation front, more than half of the Fed’s 12 districts mentioned higher energy prices were hitting both producers and consumers. Motorists have watched gasoline prices top $3 a gallon. “However, district reports generally did not indicate an increase in overall price pressures,” the Fed said.

Bernanke and his colleagues have made clear that their biggest concern would be if inflation does not recede in the coming months as they expect.

Hiring activity picked up, especially for workers with specialized skills, the Fed survey said. But most districts reported that “overall wage pressures do not seem to have increased.” Economists keep close tabs on wage growth for signs of inflation.

The survey is based on information supplied by the Fed’s 12 regional banks collected on or before June 4.

Meanwhile, the effects of the housing slump continued to be felt.

The survey found continuing weakness in residential real estate and construction. Most parts of the country characterized their housing markets as “soft or weak,” the Fed said.

The most positive report, however, came from the Fed’s New York region, where there were signs of strengthening in parts of New York City, areas of Long Island and some close-in New Jersey suburbs. But the rest of the region’s housing activity remained sluggish.

Home mortgage lending was either flat or fell in all Fed regions — except for New York, where there was a pickup in mortgage lending.