Richmond Fed chief: Economy improving

The outlook for the economy is improving, but a recovery is likely to be "slow and uneven for some time," the chairman of the Federal Reserve Bank of Richmond said yesterday as new government figures indicated the recession is waning.

"Currently, the latest data indicate that the economy is leveling out," Richmond Fed President Jeffrey Lacker said yesterday in a speech to business and community leaders in Danville, the center of a textile-manufacturing and tobacco-farming region with Virginia's highest metropolitan-area unemployment rate at 12.8 percent.

Lacker's comments came as the Commerce Department reported that the economy shrank at an annual rate of 1 percent in the April-to-June period, a better-than-expected showing and more evidence that the recession that began in December 2007 is drawing to a close.

The drop, while representing a record fourth-straight decline, was far smaller than the decline of 6.4 percent in the first quarter and 5.4 percent in the final three months of 2008, the sharpest back-to-back declines in a half-century. It also was stronger than the 1.5 percent decline that private economists expected.

Signs of recovery include housing and auto sales that are no longer a drag on economic growth, Lacker said.

Lacker said he agrees with analysts who forecast economic growth in the current quarter. "But I must emphasize that the recovery is likely to be slow and uneven for some time," he said.

High unemployment and sluggish wage growth for those who still have jobs remain major concerns, and they are likely to dampen consumer spending growth until the labor market improves, he said.

Jobless-claims figures released yesterday were better than expected but remain well above levels associated with a healthy economy. The Labor Department said first-time unemployment claims fell to a seasonally adjusted 570,000, from an upwardly revised 580,000 the previous week. The tally of those continuing to claim benefits dropped to 6.13 million from 6.25 million, the lowest level since early April.

Many economists believe the national unemployment rate, which dipped last month to 9.4 percent, will resume rising through spring.

The Commerce Department report yesterday found that businesses slashed their inventories more than first reported and cut back more sharply on investment in new plants and equipment. But those reductions were offset by revisions that showed smaller dips in consumer spending, exports and housing construction.

"When we had the meltdown in the economy in the first half of the year, a lot of companies really slashed inventory," said J. Timothy Jester, managing director and director of research for Capital Advisory Group, an investment advisory firm in Henrico County. As businesses start to restock, that should propel economic growth, he said.

"We don't see a big, robust number" for economic growth in the current quarter, he said. "But we think we will leave the recession in the third quarter."

Lacker said the Fed should continue its program designed to drive down mortgage rates at least until the economy begins to grow.

He said he would re-evaluate the program, under which the central bank has pledged to buy up to $1.25 trillion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, in the coming months. Its holdings last week averaged $607 billion, up from $542.9 billion the previous week.

This year, Lacker is a voting member of the Federal Reserve's Open Market Committee, which sets interest rates. Lacker said he is aware of the danger of undercutting "a weak, uneven recovery" if interest rates are raised too soon, but such action may be necessary to contain inflation.

Staff writer John Reid Blackwell and The Associated Press contributed to this report.