Report: Fed Sees Slow Recovery in 2002

NEW YORK – Federal Reserve officials fear a U.S. economic recovery in 2002 will be slower than financial markets currently anticipate, primarily due to business caution on making capital investments as the outlook for demand remains sketchy, The New York Times reported on Tuesday.

The report said Fed officials believe the first U.S. recession in a decade may be ending soon, but a turnaround could be sluggish in coming and might not begin to gather steam until mid-2002.

Fed officials worry that businesses will be reluctant to invest in new equipment with uncertainty still high about future demand, the health of the economy and risks associated with the war in Afghanistan, the report said.

Business investment in equipment and factories helped power the high rates of growth in the last years of the decade-long U.S. expansion that was finally broken in March this year.

As demand appeared to slow in 2000, businesses were trapped with a massive amount of overinvestment in production capacity and forced to slash capital investment aggressively, helping to drag the economy into its downturn.

On the positive side, Fed officials point to thinning inventories, a sharp rise in the stock market, relatively strong consumer spending and the effects of interest rate cuts and tax cuts already in place, the report said.

But until business capital spending fully recovers as the outlook for demand improves, Fed officials worry that any rebound will be weak, the report said.

Many private forecasters have begun to forecast a solid U.S. recovery taking hold in the first half of 2002. On that expectation, investors have dumped safe U.S. Treasuries and snapped up riskier assets like corporate bonds and stocks, pushing the Dow Jones industrial average up nearly 19 percent above three-year lows hit in the wake of the Sept. 11 attacks on the United States.

Meanwhile, recent economic reports have shown the economy rebounding solidly from its September lows, adding to the growing optimism. On Monday a national survey of manufacturing recovering more than expected in November, though it showed the sector still suffering through a 16th straight month of contraction.

And personal spending rose a record amount for one month in October as consumers were lured to auto showrooms by offers of zero percent financing.

Still, Fed officials have injected a note of caution into the debate in recent speeches. On Monday Federal Reserve Bank of Chicago President Michael Moskow said the U.S. economy is "extremely weak" and it is unclear when the country will pull free of its recession.