Fed - Economy gathering strength

WASHINGTON -- A batch of new economic reports Wednesday provided fresh evidence that the U.S. economy is continuing to gain momentum, with an unexpectedly sharp narrowing of the trade deficit and a strengthening of business activity in most parts of the country as the new year began.

The Federal Reserve reported in a nationwide survey that the economy continued to rebound from late November to the early part of this year, with retailers reporting a boost from a late surge in holiday shopping and even growing signs that the nation's battered manufacturing sector was beginning to pull out of its steep nosedive.

The Fed survey, compiled from reports from the Fed's 12 regional banks, said "the nation's economy has continued to strengthen" into the early part of January.

, with gains in such areas as auto and home sales and hints that rising orders were prompting manufacturers to begin rehiring some of the 2.8 million factory workers laid off over the past 3 1/2 years.

In another encouraging sign, the Commerce Department said Wednesday that the nation's trade deficit posted a surprising decline to $38 billion in November, down 8.6 percent from the October deficit and the smallest imbalance in 13 months.

The narrowing deficit reflected a 2.9 percent jump in exports to $90.6 billion, led by a surge in sales of civilian aircraft and soybeans and other farm products. Imports, which had hit a record high the previous month, dipped 0.8 percent to $128.6 billion in November.

Analysts credited stronger global economic growth and the falling value of the dollar against other currencies for the revival of U.S. exports and said the rebound was a major factor in their forecasts for a revival in manufacturing in the coming year.

"It's nice when economics actually works," said Joel Naroff, head of a Holland, Pa., economic forecasting firm. "The weaker dollar appears to be doing what it is supposed to do: increase exports, lower imports and narrow the trade deficits."

The news was reinforcing for Wall Street. The Dow Jones industrial average climbed 111.19 points, or 1.1 percent, to close at 10,538.37, more than making up for Tuesday's 58-point drop.

A third report Wednesday showed that the 13.5 percent drop in the dollar against other major currencies over the past year had not triggered one unwelcome side effect, rising inflation. A falling dollar makes U.S. exports cheaper on global markets but also raises the costs of imports to American consumers.

The Labor Department reported, however, that inflation at the wholesale level rose just 0.3 percent in December, reflecting a jump in energy prices. The Producer Price Index of wholesale prices had fallen by 0.3 percent in November.

Outside of the volatile energy and food sectors, the closely watched core inflation rate fell by 0.1 percent in December, matching the decline in November. It was only the third time since 1974 that the core inflation rate had posted consecutive monthly declines.

For the year, wholesale prices were up 4 percent, the biggest gain since 1990 and a reflection of the gains in energy prices. The core inflation rate outside of food and energy was up a much more benign 1 percent.

The new Fed 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.

David Rosenberg, senior economist at Merrill Lynch in New York, said Wednesday's inflation report supported his view that "the Fed remains on hold for all of 2004."

The Fed's regional survey said the strongest retail sales were reported by the San Francisco region, followed by solid gains in the Boston, Philadelphia, St. Louis and Kansas City districts.

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, the 41st consecutive month of manufacturing job losses.

In agriculture, the Fed survey said that the finding of 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.