The economy was continuing to rebound as the new year began with many regions of the country reporting that retailers enjoyed a boost from a rush of last-minute holiday shopping, the Federal Reserve said Wednesday.
Even the nation’s beleaguered manufacturing sector showed further signs of life, and the central bank said reports from its 12 regional banks suggested the economic rebound that began in the second half of last year was gathering momentum in late December and early January. Housing and auto sales remaining strong amid scattered signs that manufacturers were beginning to rehire some of the 2.8 million workers laid off over the last three years.
“Reports from the Federal Reserve districts suggest that the nation’s economy has continued to improve since the last survey,” the Fed said in the report, called the Beige Book for the color of its cover.
The new survey will form the basis for discussion when central bank policy-makers hold their first meeting of 2004 on Jan. 27-28. Most analysts believe the Fed will continue to leave interest rates unchanged at a 45-year low of 1 percent for much of this year, hoping to provide a strong foundation for a sustained economic rebound in 2004.
In other reports Wednesday, the Labor Department said wholesale prices rose by 0.3 percent in December, reflecting higher costs for gasoline and other energy products, while the nation’s trade deficit shrank to $38 billion, the lowest level in a year, as exports rose and imports fell.
The news on inflation was even better after excluding the volatile food and energy sectors. The so-called core rate of inflation actually fell by 0.1 percent for the second month in a row, leaving the core rate of inflation up just 1 percent for the whole year.
It has been the absence of inflationary pressures that has allowed the Fed to focus on promoting growth with low interest rates rather than having to consider raising rates, which it often does at this stage of a recovery, in a preemptive strike against inflation.
The Fed’s regional survey said that regional sales were generally strong throughout the country, helped by a surge in the last two weeks of December.
The strongest sales were reported by the San Francisco region, which said retail spending was up considerably from a year ago. The Boston, Philadelphia, St. Louis and Kansas City districts also reported solid gains with most other districts noting at least modest increases from a year ago.
The strength in sales was led by gains in high-end products, according to reports from the New York, Philadelphia, Atlanta and San Francisco districts, while sales at discount stores were coming in below expectations.
Nearly all Fed districts reported increases in manufacturing activity in December and several noted that factory employment edged up a bit as well. This upturn has yet to register on the national unemployment figures, with the Labor Department reporting last week that factories cut an additional 26,000 workers in December.
However, economists are hoping that various signs of a rebound in manufacturing will soon translate into significant gains in factory jobs, an expectation that the Fed survey found as well.
“Manufacturers across the country generally expect” better factory conditions in the months ahead, the survey reported, noting that manufacturers had plans to boost capital spending, especially to replace outdated computer equipment.
The survey noted that a case of mad cow disease in a herd in Washington state had resulted “in a great deal of uncertainty for cattle ranchers” with several districts reporting declines in cattle prices as a result of foreign bans on U.S. beef exports.
The 0.3 percent increase in the Producer Price Index, which measures price pressures before products reach consumers, followed a decline of 0.3 percent in November.
After three months of declines, energy prices were up 1.8 percent in December with gasoline prices spurting 5.1 percent.
For all of 2003, wholesale prices rose by 4 percent, the biggest annual gain since 1990, but economists said the better indicator of underlying price pressures was the much more modest 1 percent rise in the core rate of inflation.
Federal Reserve Chairman Alan Greenspan, in a speech Tuesday, said inflation remains subdued even as the dollar has fallen by roughly 25 percent against major foreign currencies since early 2002, a view held by many private economists as well.
“The U.S. PPI underscores lack of inflation pressure and keeps Fed tightening entirely off the radar screen,” said Sherry Cooper, chief economist at BMO Nesbitt Burns.