The U.S. economy appears to be doing quite well, with prices in check even as the resource utilization rate rises, Federal Reserve Governor Susan Phillips said this week.

"The health of the U.S. economy is really quite good at the present time, in spite of the fact that the current expansion is getting a bit long in the tooth," Ms. Phillips said at a meeting of the Economic Roundtable of Jacksonville. Inflation, she added, is "moderate," and tame inflation expectations could create the environment for a further decline in long- term bond yields.

"To the extent that we are able to bring down inflation and lower inflation expectations," Ms. Phillips said, "there's still some room on the long end for rates to come down."

Nevertheless, Ms. Phillips said, the Fed remains on guard, and current factory-use rates may worsen the inflation outlook in coming months. "Resource utilization rates in labor and product markets are relatively high," she said. "Over time, this could feasibly lead to shortages, bottlenecks that could put upward pressure on prices."

The latest capacity utilization data from the Fed showed an 83.9% rate for August, the highest since September 1995 and a 0.3% increase from July's 83.6%. A rise in auto manufacturing contributed to much of last month's increase, the Fed said.

Ms. Phillips is on the central bank's Federal Open Market Committee, which sets interest rate targets. Committee members haven't changed their target for the overnight bank lending rate since they raised it a quarter point, to 5.50%, in March. The panel is to meet again Tuesday, when it is expected to leave interest rates alone.

The Fed is trying to assess why consumer spending hasn't picked up more as stock prices have risen to record highs, adding to consumers' wealth, Ms. Phillips said.

Though "the stock market is strong and upbeat," that shouldn't be a concern in itself because actual consumer spending is more important, she said. "Consumer spending really is the key to gauging the macroeconomic future," she said.

So far this quarter, the economy appears to be growing at a "moderate" rate, Ms. Phillips said. "At this juncture, the data for the third quarter are still limited, but what we do have in hand suggests that economic activity is expanding at a moderate pace," she said.

In addition, the job market remains strong, she said. "Nonfarm employment increased at about 49,000 for the month of August. If you take into account ... the UPS strike, the number was probably more in the range of 200,000."

Even as job creation remains strong, labor costs are stable, she said. Indeed, the Labor Department's report on second-quarter productivity showed unit labor costs rising at a 0.5% annual rate, the most benign showing since a decline three years ago.

The outlook for the economy remains bright and "generally very supportive," Ms. Phillips said. "Profits have continued to expand, providing substantial cash flows for internal investments and equipment" purchases, she explained.

Separately, Ms. Phillips said Washington policymakers have done their part to help the economy.

"I'm extremely pleased and gratified by all the progress that has been made with respect to reducing the deficit," Ms. Phillips said. However, "we are still going to need to address some of the longer-run problems that are going to become obvious as the baby boomers reach retirement age.

"Strengthening the private savings rate would be of great assistance to try to address some of the longer-term deficit potential."

Economists and investors expect interest rates to stay where they are for now, partly because Fed policymakers recently have suggested the central bank is satisfied with the economy.

Just last week, for example, Fed Governor Laurence Meyer called the economy's recent performance "extraordinary." In addition,"prospects look favorable for continued expansion and relatively low inflation," he said in a speech in Pittsburgh.

"Prices are rising at a subdued rate," Ms. Phillips said. "While we did see an increase in the producer price index, I would still point out that, on the 12-month pace, the core rate is unchanged."

And consumer prices through August rose at a 1.6% annual rate, down from a 3.2% rate for the first eight months of 1996. While inflation is "well contained," Ms. Phillips said, she still has concerns about the economy, including the federal deficit and the nation's trade imbalance.

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