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Fed report shows an economy that is struggling

The country slogged through slower economic growth and rising prices during the summer, packing a double whammy to people and businesses alike.
/ Source: The Associated Press

The country slogged through slower economic growth and rising prices during the summer, packing a double whammy to people and businesses alike.

The Fed’s new snapshot of business conditions, released Wednesday, also underscored the challenges confronting Federal Reserve Chairman Ben Bernanke and his colleagues as they try to get the economy back on track.

For now, many economists predict the Fed will probably leave a key interest rate alone when it meets next on Aug. 5 — given all the economic crosscurrents. Boosting rates to fend off inflation would hurt the fragile economy and the already crippled housing market. On the other hand, the Fed isn’t inclined to lower rates because that would aggravate inflation.

The report “supports our notion that the Fed is firmly stuck on the horns” of a policy dilemma, said T.J. Marta, a fixed-income strategist at RBC Capital Markets.

Growth and inflation barometers turned worse in the summer, according to the Fed report. Some worry that the country may be headed for a bout of stagflation, that toxic combination of stagnant growth and stubborn inflation not seen in decades.

Bernanke has said, however, that he doesn’t believe the economy will suffer from stagflation. That said, the report is consistent with the economic assessment Bernanke gave to Congress last week.

“It was decidedly downbeat, “ Joel Naroff, president of Naroff Economic Advisors, said of the report. “The economy remains in trouble.”

Information from the Fed’s 12 regional banks around the country suggested that “the pace of economic activity slowed somewhat,” the Fed reported.

Consumer spending — the economy’s lifeblood — was reported as “sluggish or slowing” in nearly all the Fed regions, although the government’s tax rebate checks spurred sales for some items, especially electronics. Sales at many other stores, particularly for housing-related goods, were typically characterized as “weak or falling,” however.

Looking ahead, “the outlook for retail activity was also generally downbeat,” the Fed report said.

Auto sales, meanwhile, were characterized as “almost uniformly weak” across all Fed regions. Sales were dismal for gas-guzzling SUVs, trucks and some minivans.

Wall Street, however, appeared unfazed by the Fed report. The Dow Jones industrials were up in afternoon trading.

On the manufacturing front, activity declined in many Fed regions. Production of housing-related goods, such as construction equipment, wood products, home furnishings and heating and cooling systems were particularly hard hit. On the positive side, though, overseas demand for U.S. exports remained “generally high.”

The drooping value of the U.S. dollar, which makes U.S.-made goods and services cheaper and more attractive to foreign buyers, has helped to boost export growth. That export growth has been a key force keeping the economy afloat.

Turning to inflation, all Fed regions described “overall price pressures as elevated or increasing,” the Fed report said.

Businesses continued to be hit by rising prices for fuel, metals, food and chemicals, among other things. Many Fed regions said manufacturers planned to raise prices to customers as a way of coping with the higher production costs.

Retail prices went up in several Fed regions. In the Kansas City region, for instance, companies reported higher prices at hotels, restaurant and resorts. Chicago retailers reported raising prices charged to consumers in response to higher wholesale prices.

The government last week reported that consumer prices in June rose at the second-fastest pace in a quarter century. Wholesale prices went up sharply, too.

Oil prices, which hit a high above $147 a barrel less than two weeks ago, have retreated since then. On Wednesday, they dropped below $125 a barrel for the first time since early June. Gasoline prices are just over $4 a gallon.

On the jobs front, most Fed regions said employment conditions were about the same or slightly weaker. Employers have cut jobs for six straight months amid the economic slowdown. Housing, credit and financial problems all have weighed on growth.

Wage pressures, meanwhile, were described as “generally modest.” Economists look to wages for clues about inflation.

The Boston and Dallas regions said more workers were requesting higher wages to supplement cost of living increases.

Bernanke has said he doesn’t see a repeat of the 1970s-style situation where workers demanded — and got — higher wages to keep up with ever-rising prices. But Charles Plosser, president of the Federal Reserve Bank of Philadelphia, has warned that the Fed shouldn’t wait for signs of something like that to emerge before taking corrective action.

Plosser, an inflation hawk, has warned that the Fed might need to start to raise rates sooner rather than later to thwart inflation — even if the economy stays fragile.