Fed finds economy still lackluster in late winter, early spring

WASHINGTON -- The U.S. economy has been struggling to overcome a series of obstacles from the onset of the Iraq war to late winter storms and the outbreak of a mysterious Asian virus, the Federal Reserve reported Wednesday.

The Fed said economic conditions in March and the first two weeks of April continued to be "lackluster" with the economy still trying to rebound from a pronounced slowdown from late last year.

The central bank did say there were scattered signs of better days ahead, including pockets of strength in manufacturing, some pickup in demand for business loans and at least a slowing of job layoffs.

"The Fed is saying that there are plenty of things still to worry about, but this is the first report in quite a while to contain a few bright spots," said Mark Zandi, chief economist at Economy.com.

Richard Yamarone, chief economist at Argus Research in New York, said the Fed report may turn out to be too optimistic, especially if another wave of layoffs hits the economy, further shaking consumer confidence.

"If you look at the various quarterly earnings reports of corporations, the general tone for new hiring still remains bleak," Yamarone said.

The Fed's survey, known as the "Beige Book" for the color of its cover, will be used by policy-makers when they next meet to set interest rates on May 6.

While analysts said the central bank could cut interest rates at that meeting if there are further signs of deterioration, many predicted that the central bank would leave rates unchanged, preferring to see if the end of the Iraq war will generate a rebound in activity.

"The Fed is in no hurry to change policy, particularly if there are budding signs of economic life in the post-Iraq world," Zandi said.

Since January 2001, the Fed has cut interest rates 12 times. The last reduction on Nov. 6 pushed the federal funds rate, the interest rate that banks charge each other, down to a 41-year low of 1.25 percent.

The economy began to recover last year but in the last three months the recovery stalled out as investors grew concerned about what a possible war in Iraq would do to business prospects.

The Fed survey, based on surveys conducted by the 12 regional Fed banks, covered the period from right before President Bush ordered the first airstrikes against Iraq on March 20 through April 9 when U.S. forces took control of Baghdad.

"Reports on consumer spending were generally weak in March," the report said. "Respondents attributed part of the weakness to poor weather and the onset of the war."

The survey also found continued weakness in manufacturing but said that "pockets of improvement" were noted by more than half of the Fed districts in a variety of industries from defense contractors to manufacturers of hardware, computer chips and machine tools.

The Fed survey found that while labor markets remained soft, some districts reported that the pace of layoffs had begun to slow and there were scattered improvements in demand for temporary help.

The survey found that the Richmond, Va., Fed district, which includes Washington, D.C. observed a modest pickup in activity during the survey period but six other Fed districts -- Boston, Cleveland, Atlanta, St. Louis, Dallas and San Francisco -- all characterized economic conditions in their areas as "still mixed or soft."

The remaining five Fed districts -- New York, Philadelphia, Chicago, Minneapolis and Kansas City -- reported experiencing business activity that was "slower than reported earlier."

In addition to weak retail sales and weak manufacturing, the Fed said that some districts had reported an adverse impact on tourism from the outbreak of the severe acute respiratory syndrome in Asia. The report said that both San Francisco and Dallas regions had noted a drop in air travel attributed in part to the SARS outbreak.