WASHINGTON - The economy continued to grind along in low gear through the first half of July with only scattered signs of price pressures, the Federal Reserve said in a report released yesterday.

The report, known as the "beige book," is based on business surveys in the 12 Federal Reserve Bank Districts and will be taken into account by the Federal Open Market Committee when it meets on Aug. 17 to review monetary policy.

Fed officials are believed to be leaning toward an increase in short-term rates, but not until there is more evidence that the economy is picking up steam and generating fresh inflationary pressures.

The beige book report was generally subdued in tone, offering commentary that was not much different from the previous report on June 23. It said "economic activity continued to expand slowly to moderately" in most bank districts.

The main exception continued to be California, which is still struggling from cutbacks in manufacturing, construction, retail sales, government, and finance, the report says. A fresh round of layoffs announced by computer firms is adding to the state's woes.

Reports of price changes by business in various parts of the country were mixed. The San Francisco and Richmond districts "saw some increased prices for building materials and other raw materials." but New York and Minneapolis reported that lumber prices had declined.

The cost of producing manufactured goods rose slightly in Kansas City, and Chicago reported higher prices for auto parts. But auto parts suppliers in Boston "are under much pressure to freeze or reduce prices," the report says.

Retail prices did not seem to be much of a problem for consumers, according to the report. Richmond said that prices were rising, but in New York. Chicago, Cleveland, and Dallas, prices were called "very competitive." and some retailers actually lowered prices. Retailers in Kansas City said they were holding prices steady.

The Fed report says flooding in Midwest had "inflicted considerable damage," but, it goes on, "the effects of flooding were said to be highly concentrated and were not seen to threaten overall economic expansion in any district."

While several districts reported higher crop prices from flood losses, agricultural conditions were called "generally favorable." Kansas City and St. Louis said that in areas that were not affected by flooding, crops were generally in good condition and farmers were getting higher prices for grain. Good weather was also said to have benefited cattle raisers in the Dakotas and elsewhere.

The Fed report says manufacturing activity in most districts was sluggish, in line with other recent evidence that factories are not seeing much additional business. Most districts said that plants have not increased employment and do not plan to do so for the rest of the year. Several noted that exports to Europe were weak, although exports to developing countries remained strong.

Retail sales activity was mixed, according to the report. Although sales were up in most districts, Atlanta, Cleveland, New York, and Philadelphia reported that sales weakened slightly in July. Demand for clothing was higher in some districts, but described as weak or sluggish in others.

Home building continued to be a source of strength in most parts of country, the report says. Minneapolis said that residential and commercial construction was leading the region's expansion, and Chicago said housing activity continued to grow. Commercial building remained weak in Atlanta, Dallas, and Richmond.

The report says business loan demand was unchanged, although mortgage refinancing activity continued to boom. Bankers in New York said commercial and industrial loans rose, and Atlanta and St. Louis reported strength in auto loans. But Cleveland said business loans had softened, and Dallas said overall loan demand was down.

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