WASHINGTON (AP) – The U.S. economy remained “lackluster” in March and early April as the war in Iraq dampened consumer spending and a mysterious Asian virus cut into international airline travel, the Federal Reserve reported Wednesday.

The central bank’s latest nationwide survey of business conditions depicted an economy still struggling to emerge from a pronounced slowdown that began late last year.

The Fed said there had been only scattered signs of improvement with most of its regions reporting that “the pace of economic activity continued to be lackluster during March and the first two weeks of April.”

The survey, known as the “Beige Book” for the color of its cover, will be used by policymakers when they next meet to set interest rates on May 6. Analysts say if the economy shows no further pick-up by that time, there is a strong likelihood that the central bank will trim interest rates again.

Since January 2001, the Fed has cut interest rates 12 times as it sought to battle a severe slowdown that pushed the country into its first recession in a decade in March of that year. Later rate cuts were aimed at trying to cushion the adverse shocks of the September terrorist attacks and a wave of corporate accounting scandals. These events further jolted stock market investors still reeling from the bursting of the Internet stock market bubble in early 2000.

The economy began to recover last year but in the last three months the recovery stalled out as investors grew concerned about what a possible war in Iraq would do to business prospects.

The Fed last reduced rates in November, pushing its target for overnight bank borrowing to 1.25 percent, the lowest level in 41 years.

Analysts believe the Fed will not hesitate to cut rates even further in coming months if the economy fails to begin posting stronger growth rates now that the war is over.

However, the more optimistic forecasters believe that the economy will be showing signs of greater strength by that time and another rate cut will not be necessary.

The Fed survey covered the period from right before President Bush ordered the first airstrikes on March 20 through April 9 when U.S. forces took control of Baghdad.

The report, based on interviews conducted by the 12 regional Fed banks, said that the early part of the war had apparently kept Americans glued to their televisions and out of shopping malls. This factor and bad weather during part of the month were blamed for depressing retails sales in many Fed districts.

“Reports on consumer spending were generally weak in March,” the report said. “Respondents attributed part of the weakness to poor weather and the onset of the war.”

The survey also found continued weakness in manufacturing and businesses still cautious about boosting their investment spending. Analysts believe economic growth will not strengthen significantly until businesses boost their hiring and investment plans.

The survey found that the Richmond, Va., Fed district, which includes Washington, D.C. observed a modest pickup in activity during the survey period but six other Fed districts – Boston, Cleveland, Atlanta, St. Louis, Dallas and San Francisco – all characterized economic conditions in their areas as “still mixed or soft.”

The remaining five Fed districts – New York, Philadelphia, Chicago, Minneapolis and Kansas City – reported experiencing business activity that was “slower than reported earlier.”

Federal Reserve Chairman Alan Greenspan told Congress before the war began that he believed once the uncertainty of the war had passed, the U.S. economy was poised for a rebound in growth. He cited this as a major factor why he thought President Bush’s new round of proposed tax cuts would not be needed to stimulate the economy.

Greenspan was attacked by conservative Republicans for failing to back further tax cuts after his February comments and his critics urged Bush to pick someone else to be chairman of the Fed when Greenspan’s term is up in June 20, 2004. However, Bush on Tuesday announced that he continued to have full confidence in Greenspan and planned to nominate him for a fifth term next year.

In addition to weak retail sales and weak manufacturing, the Fed said that some districts had reported an adverse impact on tourism from the outbreak of the severe acute respiratory syndrome (SARS) in Asia. The report said that both San Francisco and Dallas regions had noted a drop in air travel attributed in part to the SARS outbreak.

AP-ES-04-23-03 1426EDT

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