Fed: Slow Growth, Still-High Prices Hit Economy

By: Associated Press
By: Associated Press

WASHINGTON - The country is stuck in a slow-growth rut, the Federal Reserve suggested Wednesday.

Higher prices for energy, food and other things are pinching people and businesses — reasons enough for the economy to be Americans' top concern heading into the presidential elections.

The Fed's report on business conditions around the nation provided fresh evidence of the toll that housing, credit and financial problems are taking on the economy as a whole.

With problems expected to persist into next year, the next president — be it John McCain or Barack Obama — is likely to face many challenges.

Heading into the fall, "economic activity has been slow" in most of the Fed's 12 regions, according to the report. Businesses described the climate as "weak" or "soft" or "subdued."

A growing number of analysts believe the economy could be thrown into a tailspin later this year and early next year as consumers and businesses curtail their spending even more.

"Over the course of this summer it became clear that the economic headwinds have not subsided as hoped," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech Wednesday.

"Most private forecasters are expecting significantly slowed growth in the second half of this year — as residential investment continues to be a drag on the economy, as consumers tighten up on their spending, as the impact of the federal tax rebate subsides, and as weakness among some of our major trading partners makes the outlook for many exports more restrained," he explained.

The Fed's report noted that consumers — major shapers of the economy — were cautious. Shoppers "concentrated on necessary items and retrenchment in discretionary spending," the Fed observed.

The Fed regions of Chicago, Dallas and San Francisco, for instance, reported noticeable declines in spending on clothing, electronics and jewelry. Sales of furniture and household appliances were weak in most parts of the country — victims of the housing slump.

Auto sales, meanwhile, tumbled, according to company reports out Wednesday. Ford Motor Co.'s U.S. sales fell 26.5 percent in August. Sales at General Motors Corp. dropped 20.3 percent from a year ago. Toyota's sales sank 9.4 percent.

Wall Street had a mixed reaction to all the news. The Dow Jones industrial average gained 15.96 points to close at 11,532.88. Other stock indexes dipped.

On the inflation front, many businesses and consumers felt the sting of high prices for food, energy and other things, the Fed reported. The recent drop in oil prices from a record-high of $147.27 in mid-July does give the Fed more leeway to keep its key rate steady. Oil prices closed at $109.35 barrel on Wednesday.

And, while businesses welcomed this drop, they told the Fed that prices still remain elevated. "Business contacts in a number of (Fed) districts indicated that they had increased selling prices in response to the high costs" for certain commodities.

Caught between dueling concerns of slow growth and inflation, the Fed is expected to leave a key interest rate alone at 2 percent when it meets next on Sept. 16 and probably through the rest of this year. The Fed at its last two meetings didn't budge the rate out of concerns about inflation. Before that, though, the Fed had aggressively cut rates to shore up the economy.

"Given all the conflicting pressures, it does serve the Fed to just keep things steady on rates for now," said Brian Bethune, economist at Global Insight.

With the Fed on hold, Democratic presidential nominee Obama has called for a second round of government stimulus, while his GOP rival McCain has favored free-trade and other business measures to spur the economy.

Workers' wage gains — characterized as "modest" — aren't raising inflation worries. Wary employers have cut jobs every month so far this year and aren't inclined to be overly generous in their compensation to workers amid "a general pullback in hiring," the Fed said.

The nation's unemployment rate jumped in July to a four-year high of 5.7 percent. Many economists predict the jobless rate will climb to 5.8 percent when the government releases the August employment figures Friday. More job losses also are expected.

The Fed's report also said that manufacturing activity was "weak or declining" in most Fed regions. Demand for housing-related goods and construction materials continued to wane. Although some manufacturers said exports were helping bolster their activity, they also noted "some recent slowing in growth from this source," the Fed said.

Export growth accounted for most of the pickup in second quarter economic activity. The economy clocked in at a 3.3 percent pace, the government reported last week. The rebound isn't expected to last, however.

Economic slowdowns overseas could make exports tail off just as Americans are hunkering down after the bracing impact of rebate checks wanes, plunging the country into another rut later this year.

In a separate report, the Commerce Department said orders placed with U.S. factories rose 1.3 percent in July as demand for commercial aircraft, heavy machinery and iron and steel all posted gains.

Factories have been helped by the drooping value of the dollar, which makes U.S.-made goods cheaper and more attractive to foreign buyers. That also has helped to boost overall export growth.


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