Fed sees signs of slowing US economy: Beige Book
WASHINGTON (AFP) — Signs of a US economic slowdown are starting to become apparent with consumer spending becoming "soft" amid a deep slump in housing, the Federal Reserve said in its Beige Book report Wednesday.
The report, to be used by the central bank at its December 11 policy meeting, said that the economy "continued to expand during the survey period of October through mid-November but at a reduced pace compared with the previous survey period."
Among the 12 districts, "seven reported a slower pace of economic activity while the remainder generally pointed to modest expansion or mixed conditions," the report said.
The Beige Book report and comments from Fed vice chairman Donald Kohn earlier in the day suggest that the central bank is willing to consider further interest rate cuts despite its official stand that the economic risks are "roughly balanced."
Kohn said the Fed "should not hold the economy hostage" to teach a lesson to financial market speculators and must remain nimble in the face of a rapidly shifting economic picture.
Analysts say Fed policymakers appear divided on the need to cut interest rates and whether the economy faces a serious downturn or recession.
Joel Naroff of Naroff Economic Advisors said Kohn "was trying to leave the door open so if the Fed does cut rates, it's not a shock. But he also exposed the schisms that exist within the Fed."
Naroff added that the Beige Book "is consistent with a Fed that's a little more worried about the economy than they had been in their last set of comments."
The Fed cut its base rate by a quarter point on October 31 to 4.5 percent following a half-point reduction September 18, saying the move was aimed at staving off a potential downturn.
Analysts are divided on the Fed's next move, but a number of economists see a cut of 25 basis points in December to further ease stress in the housing and credit markets.
The economy grew at a solid 3.9 percent pace in the third quarter but the Fed and private economists expect a much slower pace in the fourth quarter and into 2008, and some say a recession is possible if credit conditions stay tight.
The Beige Book noted that the main drag on the economy was the housing market.
"Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown," it stated.
"Most districts pointed to further increases in the inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers."
As for consumer spending, which accounts for two-thirds of economic activity, the Fed said the surveys from its regional banks were lackluster.
"District reports indicated relatively soft retail spending; most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year," it said.
Manufacturing meanwhile "was mixed across subsectors but appeared to be largely stable on balance," it added.
Banks reported their business lending still at relatively high levels despite a "downward slide" in home loans, the report said
Prices were generally stable or down except for products and services dependent on food and energy inputs, where prices rose significantly. Some districts did point to higher prices on imports because of the falling dollar.
"Increases in prices of final goods and services generally remained modest, except for food and energy," the Beige Book said.
"Increases in the costs of energy and petroleum-related materials created upward pressures on transportation costs and the prices of some manufactured items; many producers responded by increasing final sales prices, although limited pricing power forced some to absorb cost increases in profit margins."
