Fed's Moskow sees some signs US economy improving

Moskow also said he expects U.S. economic activity will be stronger in the second half of 2002 than in the first half but that there were still risks facing the ailing economy as it climbs its way out of a 10-month-old recession.

"We at the Chicago Fed believe we are in a period of transition," Moskow told the Mid-America Club during a luncheon in Chicago. "The economy will recover, but, as I noted, the signs are still preliminary and the timing uncertain."

Moskow, striking a cautious tone similar to that projected by Fed Chairman Alan Greenspan on Friday, said there were several positive signs that have emerged from recent economic reports but noted that the "data are mixed."

First, he said the pace of deterioration in the U.S. labour market "appears to be moderating."

Although the U.S. unemployment rate climbed to 5.8 percent in December, its highest level in more than six years, the drop in the number of workers on the job was a seasonally adjusted 124,000 following a 371,000 fall in November. The decline in the pace of layoffs led many economists to suggest that the labour market may be close to stabilising.

Moskow also noted that consumer spending has recovered after taking a hit following the 11 September attacks. The housing sector also continues to be strong and inventories appear to be pared down to the point that businesses soon will have to start ordering goods to restock their empty shelves, he said.

The Chicago Fed chief also said recent data have suggested that the hard-hit factory sector may be turning the corner.

"We have seen some tentative signs that the sector may be bottoming out," said Moskow, who is not a voting member this year on the Fed's policy-making panel, following the usual rotation among Fed presidents. But Moskow tempered his remarks, noting that there were still risks to the economy.

"I must emphasize that we still face a period of uncertainty," he said. Moskow said the uncertainty stemmed from the risk of further attacks on U.S. soil, weakness in economies abroad and a question mark over how long businesses will remain "risk averse" and hold back on spending.

He also said that since the U.S. unemployment rate typically increases after an economic recovery takes hold, consumers who have lost their jobs or are nervous that a pink slip may soon appear in their mailbox may keep their wallets shut - a significant problem since consumer spending accounts for two-thirds of all U.S. economic activity.

"Of course, not all risks to the household sector forecast are on the downside," he said. "Generous retail discounts and low interest rates could boost spending more than expected."

Moskow's comments came a little more than two weeks before the Fed next meets to discuss interest rates. Many believe the Fed will cut interest rates at the meeting, scheduled for 29 January and 30, after slicing them 11 times in 2001 to try to boost the economy.

Click the link on the top right to read the full speech.