October 28, 2004 in Business

U.S. economy weathering hurricanes, energy prices

Martin Crutsinger Associated Press
 

WASHINGTON – The U.S. economy continued to grow in the early fall despite being buffeted by rising energy costs and hurricanes, the Federal Reserve said Wednesday, providing its last snapshot of business conditions before Election Day.

The survey of business activity around the country, compiled from reports submitted by the Fed’s 12 regional banks, depicted an economy that was moving ahead despite the string of hurricanes that hit Florida and other Southern states and a surge in crude oil prices.

“Economic activity continued to expand in September and early October,” the Fed said in the new survey.

The Fed’s report will be used by central bank policy-makers when they next meet Nov. 10 to decide whether to raise interest rates further.

Many economists believe the central bank will push up rates for a fourth time this year in an effort to make sure a rebounding economy does not generate unwanted inflationary pressures. They said there was nothing in the new Fed report to shake that view.

“The Fed is saying the economy should grow at a decent pace even if there are some potholes along the way,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Before the Fed started raising rates in late June, the federal funds rate stood at a 46-year low of 1 percent. Even with a fourth quarter-point increase, the rate would still be at an unusually low level of 2 percent.

Sohn suggested the central bank may leave the funds rate at the 2 percent level, skipping the chance to raise rates at its last meeting of the year in December and for the first few meetings of 2005.

“Clearly, the economy is not as strong as anticipated and there is going to be some further fallout from the higher oil prices,” Sohn said.

On Wall Street, stocks staged a strong rally, posting a second consecutive triple-digit gain for the Dow Jones industrial average, pushing it back above the 10,000 mark.

The Dow shot up 113.55 points to close at 10,002.03 after Tuesday’s 138-point rise. Investors were relieved that oil prices, which had hovered around the $55-per-barrel level for several days, retreated to $52.46 on Wednesday.

The Fed noted that the jump in energy prices was acting to dampen consumer and business spending. But the central bank did not signal any concerns that this year’s price spike will be large enough to bring on a recession, as the oil shocks of the 1970s and early 1980s did.

The economy’s performance has become a top issue in the presidential campaign. President Bush contends his tax cuts have set the stage for stronger growth in the years ahead while Democratic challenger John Kerry argues that Bush’s tax cuts represented a windfall for the wealthy while doing little to boost the overall economy.

In other economic news Wednesday, the Commerce Department reported that orders for big-ticket manufacturing goods edged up a modest 0.2 percent in September. Sales of new homes were up a bigger-than-expected 3.5 percent to the third highest monthly level on record.

The rise in new home sales pushed activity to an annual rate of 1.21 million units in September, the third highest level on record behind only March and May of this year.

The 0.2 percent rise in durable goods orders in September was only the third increase of the past six months. Orders were up 1.9 percent in July and 1.3 percent in June after having posted a 0.6 percent drop in August and even bigger declines in May and April.

The Fed report, however, found some hopeful signs that manufacturing, which has shed 2.7 million jobs since Bush took office, was beginning to turn the corner with a number of districts reporting rising production.

Both the Atlanta and Dallas districts did report some production disruptions from the hurricanes that hit the South.

The Fed said wage pressures for the most part remained contained, although occupations where workers were in short supply, such as truck drivers and skilled tradespeople, were reporting scattered wage pressures.

Farmers were having a good year in most parts of the country, with corn and soybean farms expected to set record levels of production this year, the survey found.

© Copyright 2004 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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