Wed Aug 18, 2004
By Victoria Thieberger

NEW YORK, Aug 18 (Reuters) - Recent economic news seems to support the Federal Reserve's view that the soft patch in the U.S. economy in June was temporary, a senior Fed official told Reuters on Wednesday.

"The data since the FOMC meeting (on Aug. 10) confirms there was a soft patch in June, and a lot of the new data we have got on July suggests that the lull in June probably won't linger," said Loretta Mester, head of research at the Philadelphia Federal Reserve and top advisor to President Anthony Santomero.

Santomero will be a voting member on the Fed's interest-rate committee next year.

"It seems it was a lull, as opposed to a change in the underlying economic outlook," Mester said in a telephone interview.

She cited a recovery in retail sales in July and upward revisions for June, improved auto sales and a rebound in housing data and industrial production in July. The last two figures were released on Tuesday and showed industrial production rose 0.4 percent in July, while housing starts jumped the most in nearly two years with an 8.3 percent rise.

A wave of soft economic data in recent weeks prompted some analysts to revise down their forecasts, and the sour news has weighed on the stock market and boosted bonds.

But the Federal Reserve, when it raised official interest rates last week to 1.5 percent, argued the economy was "poised" to regain momentum after a temporary slowdown. Mester's comments on the economy were the first by a Fed official since the rate hike.

It was the Fed's second rate increase this year, and more are expected despite the recent soft economic news. Officials have said they intend to make a "measured" series of tightenings toward more normal levels.

MIXED SIGNALS ON JOBS

The one contradictory report was July payrolls, which showed a disappointing gain of 32,000 jobs.

Mester said the employment figures were a "puzzle" but that the report contained some upbeat elements, such as an increase in labor force participation, a decline in the average duration of unemployment and a fall in the jobless rate itself.

"Those were positives in an overall negative payrolls report, and initial claims (for unemployment insurance) are trending down," she said.

The employment report for August could be affected by Hurricane Charley, which hit Florida last week, Mester said, although this was more likely to show up in the length of the workweek than actual payrolls. The payrolls survey counts people as employed as long as they worked part of the week.

In its statement last week, the Federal Reserve attributed much of the recent slowdown to high energy costs, which are still rising. The price of oil touched a fresh record on Wednesday of $47.50 a barrel in after-hours trade, up nearly $10 a barrel since the end of June.

Mester acknowledged high oil prices will be a dampener on growth, citing studies that a sustained $10 increase in oil cuts economic growth by about 0.5 percentage point in a year.

"So the increases we've seen for now will dampen growth, but they're not enough to send the economy back into recession," she said.

Mester said part of the recent surge in oil prices was demand-driven, but said the economy is less dependent on oil than it used to be. In addition, oil would need to be near $80 a barrel to be comparable to the prices of the late 1970s after adjusting for inflation.

Regarding the Philadelphia Fed's district, Mester noted the regional economy had not shown the same slowdown in June as the national picture, and companies were in fact reporting they wanted to hire. But they had trouble finding skilled applicants.

Problems included basic skills like reading and writing, not just more advanced technical or machinery skills.