Fed Says Growth Still Strong, Manufacturing Sector Improving

WASHINGTON — The economy is growing strongly with even the beleaguered manufacturing sector showing signs of an upturn, the Federal Reserve said Wednesday in its latest survey of business conditions around the nation.

While nearly every region of the country faced labor shortages, wage pressures did not seem to be accelerating or causing widespread pressures on inflation, the Fed said in its “beige book” report.

Financial markets took heart from the Fed’s lack of alarm about inflation. But private economists said the report did not change their view that the central bank is getting ready to raise interest rates for a second time this year when policymakers meet Aug. 24.

“The message from this report is that the economy is doing very well with inflation tame, but it is bumping up against capacity constraints,” said Mark Zandi, economist at Regional Financial Associates in West Chester, Pa. “Fed officials are laying the groundwork for another rate hike.”

Private economists noted the numerous warnings the “beige book” included about labor shortages, low inventory stockpiles for retailers and supply constraints. They said all of this supported their view that the Fed will raise interest rates by another quarter-point later this month.

The Fed report, compiled from surveys by the Fed’s 12 regional banks, said the economy continued to show strength in late July and early August. Consumer demand and housing construction remained strong, and various manufacturing sectors shook off the effects of the Asian currency crisis, which has cut sharply into their export markets.

“Widespread labor shortages persist in virtually every district, but there have been only scattered reports of acceleration in wages,” the Fed survey said. “There are some reports of accelerating prices--largely related to home construction--but there is no evidence of any broad-based pickup in consumer price inflation.”

The San Francisco, Boston, Cleveland and Dallas Fed districts reported strong demand for computer and telecommunications equipment, the Fed said.

The San Francisco Fed said manufacturing activity picked up in much of the district, although import competition continued to temper growth in some sectors.