Economy Loses Speed, Shopping Slows

AP
Fed: Economy Loses Speed, Shopping Slows
Wednesday November 28, 2:44 pm ET
By Jeannine Aversa, AP Economics Writer
Fed Says Economy Logged Slower Growth As Shoppers Watched Pennies Heading Into Holiday Season

WASHINGTON (AP) -- The economy grew at a slower pace in the late fall as shoppers watched their pennies heading into the busy holiday season.

The Fed Reserve's new snapshot, released Wednesday, suggested that the strains from a severe housing slump and a painful credit crunch are affecting the behavior of individuals and businesses alike -- making them somewhat more cautious.

"Reports on retail spending were downbeat in general," the Fed survey said. "Most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year," the Fed added.

Spending by consumers and businesses is the lifeblood of the country's economic activity. The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful the country will weather the financial storm without falling into recession.

The Fed report found that the national economy continued to grow during the survey period of October through mid-November but at a "reduced pace." Of the 12 Fed regions surveyed, seven reported a slower pace of economic activity, while the remainder generally pointed to "modest expansion or mixed conditions," the Fed said.

The findings will figure prominently into discussions when Federal Reserve Chairman Ben Bernanke and his colleagues meet on Dec. 11 to decide their next move on interest rates. Investors and some economists believe the Fed will slice rates for a third time this year in light of a fresh spell of turbulence on Wall Street. That turmoil reflects fears that the housing and credit problems could push the economy into recession.

However, the hope of additional rate cuts gave Wall Street a big lift on Wednesday. The Dow Jones industrial surged more than 200 points.

Fed Governor Donald Kohn, in a speech Wednesday, warned that if the financial turmoil seen in recent weeks were to persist, it could further crimp the flow of credit to people and businesses, raising risks to economic growth.

Kohn, the No. 2 official at the Fed, said the recent gyrations on Wall Street "partly reversed some of the improvement in market functioning" seen in late September and in October. The credit crunch had taken a turn for the worse in August, causing stocks to nosedive.

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York. Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed stock prices and could induce lenders and other financial companies "to adopt a more defensive posture in granting credit, not only for house purchases but for other uses as well," Kohn warned.

Against the backdrop of such uncertainty about how forces will play out with consumers and businesses, Kohn once again said Federal Reserve policymakers must remain "nimble." In his view, "these uncertainties require flexible and pragmatic policymaking," Kohn said.

Wall Street viewed Kohn's comments as hinting that additional rate cuts could be forthcoming.

The Fed has sliced interest rates twice this year -- in September and late October -- to keep the housing collapse and credit crunch from throwing the economy into a recession. Fed policymakers at the October meeting signaled that further rate reductions may not be needed. Since then, however, financial markets have suffered through another period of turmoil.

Besides "relatively soft" spending at the nation's retailers, the Fed survey said manufacturing production was mixed. Demand was weak for products related to housing but was solid in other areas, including information technology equipment and machinery used in the energy sector and mining industries.

In a separate report from the Commerce Department, orders for costly manufactured goods dropped 0.4 percent in October. It was the third straight decline.

On the inflation front, the Fed report said high energy and food prices pushed up production and transportation costs for some companies. Expensive energy and food also put "significant" pressure on the prices of products and services that rely heavily on these materials. But most other prices were largely stable or down a bit, the Fed said. That suggested that high energy and food prices aren't spreading inflation through the economy. Still, Fed officials have made clear they are closely watching inflation.

National employment conditions are still mostly good, although construction and other jobs have taken a hit. In general, increases in workers' wages were moderate.

The positive forces of job creation and wage growth are helping to offset some of the negative forces of weaker home values and harder-to-get credit.

"Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amid the ongoing slowdown," the Fed survey said. Builders continued to shelve projects and lay off workers in many areas. The number of unsold homes continued to mount. Builders and others in the business "generally do not expect a significant pickup in homebuilding until well into next year at the earliest," the Fed said.

The National Association of Realtors reported Wednesday that sales of previously owned homes fell by 1.2 percent in October, the eighth month in a row of declining sales. The median price of a home sold last month declined to $207,800, a drop of 5.1 percent from a year ago, the biggest year-over-year price decline on record.

The Fed survey was based on information that the Fed's 12 regional banks collected before Nov. 16 and is consistent with the view that economic growth will slow sharply in the October-to-December quarter.

The economy is expected to log growth at a 1.5 percent pace or less in the final three months of this year.