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Economy showing fresh signs of life

America’s economy, which has been poking along, displayed fresh signs of gaining a bit of momentum in June and the first half of July, the Federal Reserve said Wednesday.
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The pace of economic growth, which has been disappointingly slow since late last year, has picked up “a notch” since early June, the Federal Reserve said Wednesday in its latest snapshot of business activity around the country.

Fed officials in most of the system’s 12 districts reported signs of economic strengthening, particularly in manufacturing. Consumer spending, however, remained “lackluster” in most of the country with the notable exception of New York, where improving weather contributed to stronger retail sales.

Officials in three districts — Chicago, St. Louis and San Francisco — characterized economic activity as sluggish, according to the Fed’s Beige Book report of regional conditions.

Even though the report was considered the strongest Beige Book of the year, the evidence of economic recovery was patchy and tentative, leaving independent analysts and financial markets unimpressed.

“It is the best one (in a while), but the way I read it, it still isn’t much to write home about,” said Mary Ann Hurley, a bond trader at D.A. Davidson & Co. “They say it increased a notch. A notch is good, but a notch is not enough to stop the deflationary pressures in the economy. We need strong growth.”

The Beige Book, released in the afternoon, had little impact on financial markets, where traders were looking forward to a flood of key economic data due out over the next two days. Stock prices ended little changed, while bond prices rose sharply as recent waves of selling subsided.

Among the important upcoming economic figures are the July employment report and a monthly survey of manufacturers, both due Friday.

“Reports from the 12 Federal Reserve districts provided additional signs that the pace of economic activity increased a notch during June and the first half of July,” the Fed said in the Beige Book, based on assessments completed by July 21. “Consistent with the generally more positive assessments of current economic activity, several districts noted increased optimism about economic prospects in coming months.”

Scott Brown, chief economist at Raymond James, called the Fed report an improvement but noted that it “still fell short of outright strength.”

“I guess it’s a start,” he said. “But I think investors may be getting a little bit impatient with the second-half recovery story.”

The key, according to most economists, is employment.

Goldman Sachs economist Jan Hatzius published a note late Tuesday that questioned whether the weak labor market “could derail the budding acceleration in the growth pace.”

Although he concluded it was unlikely, Hatzius said it was possible that labor market deterioration could become “self perpetuating,” leading to further declines in confidence and spending and pushing the economy into recession.

Last month the economy, although technically expanding, lost jobs for a fifth straight month, and the unemployment rate surged to a nine-year high of 6.4 percent. Hatzius noted that similar increases in the jobless rate have preceded recessions.

Most economists look for the July employment report to show conditions little change from June, with the economy gaining perhaps 10,000 jobs and the unemployment rate ticking down to 6.3 percent. Mark Vitner, senior economist with Wachovia Securities, said last months report might have been influenced by unusual seasonal factors, and he predicted the economy might show a surprisingly strong gain of 100,000 jobs or more.

“There is no denying that the economy has picked up on a broad front,” he said. “The recovery is gaining momentum. While it’s broad-based, it’s not a rip-roaring economy.”

Consumers certainly are not fully convinced, based on a report this week that showed a sharp drop-off in consumer confidence.

“I think the confidence numbers got ahead of the economy for a while,” said Kurt Karl, chief economist for Swiss Re in New York. “I think there was a boost to the numbers on postwar euphoria and then reality set in. The economy didn’t change a lot between March and July.”

The Fed’s survey of business conditions, named for the color of its cover, will be used by policy-makers when they meet on Aug. 12 to set interest rates. At their last meeting June 25, central bankers elected to give the recovery a little push, cutting the benchmark overnight rate by a quarter-point to 1 percent, a 45-year low.

Fed Chairman Alan Greenspan suggested in recent congressional testimony he is willing to push the rate all the way to zero if needed to guarantee a decent recovery. Analysts believe the Fed probably will hold short-term interest rates steady at the August meeting.

Greenspan and private economists believe the economic growth, which has been limping along, 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, strengthening the economy.

Even if that turns out to be the case, the job market is likely to remain sluggish, economists say.

The Fed’s report said that housing sales remained strong across various districts, helped out by low mortgage rates. However, mortgage rates have been climbing 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 Associated Press contributed to this report.