Fed Finds Soft Spots In U.S. Economy

By Nell Henderson and Cecilia Kang
Washington Post Staff Writers
Thursday, March 8, 2007

New England automobile dealers say their sales are awful. A New York City employment agency reports that hiring has slowed in recent weeks. And a North Carolina textile maker plans to shutter a plant in Virginia. In the mid-Atlantic, strong growth in services -- including the legal, medical and financial professions -- offset weaker retail sales and manufacturing.

These and other anecdotes from businesses across the country suggest that the economy has slowed recently in some regions and industries, the Federal Reserve reported yesterday.

Overall, the economy expanded modestly from late January through February, but some soft spots have emerged, according to the Fed's "beige book," a survey of regional economic conditions prepared to help central bank policymakers as they consider whether to adjust interest rates at their next meeting, March 20 and 21.

The survey was conducted before the stock market's plunge on Feb. 27 and before the release of government figures showing further weakening in manufacturing. Home construction, factory orders and orders for big-ticket durable goods all fell sharply in January.

Federal Reserve Chairman Ben S. Bernanke told Congress on Feb. 28 that the stock market turmoil had not changed the central bank's forecast that the economy will expand moderately this year, between 2.5 and 3 percent.

But the latest information suggests that the economy may be losing momentum as the housing market slumps, the domestic auto industry struggles, and businesses become more cautious in their hiring and spending. The Fed wanted economic growth to moderate for a while to dampen inflation but does not want it to tumble into a recession.

If the economy slows more, the Fed will face an unpleasant choice. Normally, policymakers would consider cutting interest rates to spur growth. But inflation quickened in January, and Bernanke warned Congress last month that the central bank would consider raising interest rates to restrain price increases.

Cutting rates now might fuel inflation, and raising them might cool growth too much and guarantee a recession -- the classic dilemma for central banks.

The Fed has left its benchmark short-term rate unchanged since June. The beige book's mixed picture bolsters the case for leaving the rate on hold at the coming meeting, as well.

In the mid-Atlantic, demand remained strong for services related to construction, such as floor finishing and air-conditioning installation, according to the Federal Reserve Bank of Richmond, which serves the Washington area, the Carolinas and most of West Virginia. The housing market in the mid-Atlantic "showed signs of firming," the Fed said.

But a clothing store in Howard County said sales had slipped. A Virginia ski resort blamed the warm weather for its worst ski season in 16 years. And a North Carolina furniture maker said "the industry was in dire straits," according to the report, which does not identify the businesses that responded to the survey.

Auto parts production declined in the region, partly due to sluggish demand for American cars nationwide, said Ray Owens, an economist at the Richmond Fed. And furniture makers were hurt by falling home sales, which have lowered demand for home furnishings.

Some businesses "suggested overseas competition was behind the downturn in their markets," Owens said.

© 2007 The Washington Post Company