Rebound? Firms Aren't Buying It

Government reports released Monday indicated businesses remain skeptical of the economy's vitality, even as analysts say the economy will grow faster that it has since 1999 in the second half of this year.

Businesses' sales rose by 1.6 percent in July, the biggest increase since March, the Commerce Department said Monday. But stocks of unsold goods at the nation's businesses dipped by a mere 0.1 percent in July, a sign that companies remain wary of increasing inventories amid other indications of economic strength.

Also Monday, the Federal Reserve reported that industrial activity edged up by just one-tenth of one percent as weakness in the manufacturing sector kept industrial production restrained in August.

The Commerce Department also reported that the nation's trade deficit reached a record $138.7 billion.

Despite the mixed numbers, some analysts believe the economy is headed for a turnaround.

The National Association for Business Economics, or NABE, forecast the gross domestic product, the country's total output of goods and services, would grow at a 4.5 percent annual rate in the July-September quarter and at a 4 percent rate in the October-December period.

That forecast, if proven correct, would mark the first time since 1999 that the GDP has been able to grow at a rate of 4 percent rate or better for two consecutive quarters.

The question plaguing economists is: When will the growth translate into new jobs? To date, businesses have been unwilling to expand their payrolls despite signs of a rebound.

"We are seeing very clear evidence of a strong pickup in activity this quarter," said Lyle Gramley, a former Fed governor and now senior economic adviser at Schwab Washington Research Group, a financial services firm. "The evidence is in so much abundance that it has everybody revising up their forecasts."

Noting that trend, Vice President Dick Cheney told NBC on Sunday, "I think we've turned the corner and we're making significant progress, and that's part of the normal business cycle, as well as the added unusual factors of a national emergency" — the Sept. 11 attacks.

Federal Reserve Chairman Alan Greenspan and his colleagues last cut interest rates in June. They pushed their target for the federal funds rate, the interest that banks charge each other for overnight loans, down by one quarter of a percentage point to a 45-year low of 1 percent.

At the time, the Fed's action to lower a key short-term interest rate failed to have the desired impact on the economy. Long-term rates set in financial markets actually rose on the news.

Hopes for these bolder Fed moves had arisen as a result of the central bank's expressions of concern, beginning in May, about the possibility the economy could face a threat from deflation. The nation last experienced that destabilizing decline in prices during the Great Depression of the 1930s.

But in recent weeks, long-term rates again have declined as Fed policy-makers have sought to convince markets that they are prepared to leave interest rates at low levels for as long as it takes to guarantee a sustained recovery.

In the statement issued after its August meeting, the Fed said it believed that rates could remain low "for a considerable period."

If the hoped-for rebound does stall anew, analysts said the Fed will not hesitate to cut rates, even dropping the funds rate to zero if necessary to ensure an economic rebound. That possibility was discussed by Fed Governor Ben Bernanke in a September speech that trigged a rally in the bond market.

It was nearly two years ago that the economy pulled out of a recession. But companies still are laying off workers; this year alone, almost half-million jobs have been lost. For this reason, too, analysts think the Fed will leave interest rates low for a considerable time.

"The Fed is looking at a world where the economy seems to be picking up but there is no evidence of that yet in the labor market," said David Wyss, chief economist at Standard & Poor's Co. in New York.

Analysts believe interest rates will not move until the central bank sees convincing evidence that the jobless rate, now at 6.1 percent, is falling on a sustained basis and companies are finally beginning to rehire workers.

That is not likely to happen soon. The strong productivity gains the economy is experiencing have allowed companies to do more with fewer workers.