Fed: Economy still slow
August 8, 2001: 4:34 p.m. ET

Latest 'beige book' report shows slow retail sales, manufacturing
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NEW YORK (CNNfn) - The malaise in the U.S. economy lingered through June into July, as retail sales slumped and manufacturing weakness spread into other businesses, the Federal Reserve said Wednesday in its latest report on business conditions.

According to the Fed's "beige book" report, a compilation of anecdotal evidence about the economy's health in June and July, most of the 12 Fed districts reported slow growth or, in some cases, flat economic activity.

"Retail sales generally were sluggish and frequently below expectations, despite substantial discounting on a wide range of consumer goods," the report said, adding "sustained weakness in the manufacturing sector spilled over to other businesses" including shipping and commercial real estate.

The decline in retail sales is an ominous sign that consumers, whose spending fuels two-thirds of the nation's economy, may finally be pulling back, possibly for fear of their jobs. Businesses struggling to cope with the slowdown have cut hundreds of thousands of workers since late last year.

On the brighter side, the Fed said low mortgage rates helped the housing market thrive, while many prices -- including those of fuel and consumer goods -- fell.

Wage costs also fell, but mostly because of rising unemployment, while benefit costs rose, responding to the high price of health insurance.

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The report, named for the color of its cover and compiled this time by the Federal Reserve Bank of San Francisco based on information gathered before July 30, will be used by the Fed when it meets Aug. 21 to set interest rates.

The Fed, the nation's central bank, is widely expected to cut its target for short-term rates for a seventh time this year as it tries to keep money flowing through a sluggish economy and avoid a recession, defined as two consecutive quarters of economic contraction. So far, it has succeeded.

"At least [economic activity] is no longer 'decelerating,' as reported in the previous beige book," said Ian Shepherdson, chief U.S. economist with High Frequency Economics Ltd.

Wall Street was not so sanguine, as U.S. stocks tumbled after the report's release. U.S. Treasury bond prices jumped as investors sought safe havens for their money and grew more certain of another Fed rate cut, sending yields sharply lower.

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The beige book confirms the ongoing slowdown signaled in recent reports on gross domestic product (GDP), manufacturing and unemployment.

Economic growth, as measured by GDP, slid to a 0.7 percent annual rate in the second quarter -- the weakest performance in eight years -- while unemployment hovered at 4.5 percent and manufacturing activity shrank for the 12th straight month in July.

Still, many economists -- and the Bush administration -- are counting on the impact of the Fed's aggressive rate cuts and $40 billion in tax rebate checks to jump-start the economy.

If their forecasts prove correct, then the 0.7 percent GDP growth rate in the April-June quarter will turn out to be the slowest point for the economy. Many of them are predicting growth will rebound to 2 percent in the third quarter and above 3 percent in the fourth quarter. graphic

-- from staff and wire reports


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Beige Book report

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