The US economy is struggling to break out of the doldrums, with widespread sluggishness infecting retail sales, according to a regular survey of business conditions by the Federal Reserve.
The Fed's "beige book" collection of grassroots reports by its district banks said the housing market was the only bright spot in an otherwise weak economy. But Fed chairman Mr Alan Greenspan sounded an optimistic note yesterday, saying US productivity gains in the late 1990s could continue.
The survey suggested the weakness in retail sales already evident in official figures for September had persisted into October. It said: "Retail sales were weak across the nation, including some declines in motor vehicle sales from very high levels." Commercial real estate markets softened, while demand for labour was "lacklustre".
Financial markets are still betting that the Fed will keep rates unchanged at 1.75 per cent at its next meeting on November 6th. Economists at the Chicago Board of Trade calculated ahead of the beige book's release that the futures market was pricing in a 68 per cent chance the Fed would leave rates on hold.
Mr Daniel Grombacher, senior economist at the board of trade, said: "My bet is that the Fed will be looking to get through the rest of the year without a rate cut." Share prices fell ahead of the survey's release, with the S&P 500 nearly 2 per cent down around the middle of New York trading.
Two Federal Open Market Committee members, Mr Edward Gramlich, Fed governor, and Mr Robert McTeer, Dallas Fed president, dissented from the majority and voted for lower rates at last month's meeting. But since then, other Fed policymakers have sounded content to wait and watch developments unfold, while expressing concern about the sluggish recovery.
Mr Ben Bernanke, who has recently joined the FOMC as a Fed governor, said this week: "Consumers' willingness to buy houses and cars suggests they are still optimistic." But he warned: "They cannot continue on their own forever, and I won't feel comfortable until firms start investing again."
Mr Greenspan's speech addressed concerns that the rapid rise in productivity growth over the past year could be transitory, as firms trimmed fat in the face of softening demand. Although acknowledging that risk, he said the underlying improvement in productivity growth which Fed economists estimate has risen to 2 to 2.75 per cent a year looks likely to continue in the medium term.
He said: "Given the difficult adjustments that our economy has been undergoing, long-term productivity optimism may currently seem a bit out of place. Nevertheless, it is both remarkable and encouraging that, despite all that has transpired over the past couple of years, a significant step-up in the growth of productivity appears to have persisted."
Output per hour rose 4.8 per cent in the year to the second quarter of 2002. But economists have warned this is common in downturns, as firms lay off workers more quickly than production slows.
- (Financial Times Service)