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Fed: Outlook for economy has darkened

The Federal Reserve says the economy started the new year on weaker footing and the outlook appears equally dim.
/ Source: The Associated Press

The U.S. economy started the new year on weaker footing as recession-shocked Americans retrenched further, forcing retailers to ring up fewer sales and factories to cut back production.

The Federal Reserve's new snapshot of business conditions nationwide, released Wednesday, suggested the country's economic picture has darkened over the last two months. The outlook appears equally dim.

"Overall economic activity continued to weaken across almost all of the Federal Reserve's districts," the report concluded.

To help brace the economy, Fed Chairman Ben Bernanke and his colleagues have signaled that they will leave a key interest rate at record-low levels for some time.

In an unprecedented move last month, the Fed ratcheted down its rate to hover between zero and 0.25 percent. The Fed will keep rates in that range at its next meeting on Jan. 27-28 and probably for much — if not all — of this year, economists predict. The Fed also has pledged to use other unconventional tools to revive the economy.

The recession, which just entered its second year, already is the longest in a quarter-century and appears likely to be the longest downturn since World War II.

Most retailers reported "generally negative" holiday sales and are cautious about sales prospects in the months ahead, according to the Fed report based on information collected between late November and Jan. 5.

"Many retailers in the Philadelphia, Atlanta, Kansas City and Dallas districts expected continued weakness or sluggish sales," the report said. "Expectations were mixed in the Cleveland district, and retailers in the Boston district were watchful."

This week alone, regional department store chain Gottschalks Inc. put itself up for sale and said it had filed to reorganize in a Chapter 11 bankruptcy, discount clothing chain Goody's Family Clothing also filed for Chapter 11 bankruptcy protection, and luxury department store retailer Neiman Marcus Group Inc. said it was cutting about 375 jobs.

"Many retailers became convinced the Grinch did indeed steal Christmas," Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in a speech Wednesday.

Consumer spending — which includes retail sales — is a major shaper of national economic activity. But job cuts, sinking home values and cracked nest eggs have made American consumers wary of spending.

In a separate report Wednesday, the Commerce Department said retail sales tumbled 2.7 percent in December, marking a record six straight months in which sales have declined. For all of 2008, sales dipped 0.1 percent, the first annual drop on government records going back to 1992.

At factories, "activity continued to fall" in most Fed districts, with "declines reported across a wide range of industries," the Fed reported.

Many manufacturers expected more cutbacks in the future. "Boston, Philadelphia, Cleveland, Minneapolis, Chicago and Kansas City mentioned reductions in capital spending or plans to reduce capital spending in 2009," according to the report.

Activity in the services sector of the economy also declined in most Fed regions. Transportation, travel and tourism-related services were among the industries hit.

Meanwhile, the housing market fell deeper into a rut in and commercial real-estate markets deteriorated in most Fed regions.

With companies seeing customers' appetites sag, employers throttled back hiring, the Fed report said. They axed jobs, cut workers' hours, froze workers' pay or reduced compensation.

The nation's unemployment rate bolted to 7.2 percent in December, a 16-year high, the government reported last week. For all of last year, a staggering 2.6 million jobs were eliminated, the most since World War II.

The Fed report, based on information supplied by the Fed's 12 regional banks, will figure into discussions by Bernanke and his colleagues later this month when they assess economic and financial conditions.

"The economy is in the midst of a serious recession that seems likely to persist for at least another two quarters," Gary Stern, president of the Federal Reserve Bank of Minneapolis, said in a speech Wednesday.

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