Economic Downturn Expands Countrywide
Thursday, March 6, 2008
The economic downturn, which started in the handful of states where the housing market was in the worst shape, is spreading to almost every corner of the country and to a wide variety of industries, according to a Federal Reserve report released yesterday.
The trouble is showing up in such disparate ways as weaker demand for staffing services in New England, lower trucking volume in Ohio and surrounding states, and a resistance to spending money on capital projects by financial institutions on the West Coast.
That assessment is based on the "beige book," a compilation of anecdotes from businesses around the country gathered by the Fed's 12 regional banks. The previous report, in the middle of January, found signs of weakness in certain states and industries but described a U.S. economy that was generally holding up.
This time, two-thirds of the Fed's districts described a softening or weakening in the pace of business activity, and the others all referred to subdued, slow, or modest growth.
"The slowing is broad-based," said Julia Coronado, a senior U.S. economist at Barclays Capital. "It's definitely not just a regional issue anymore."
There was some better news about the economy yesterday, though in the current environment, better is a relative concept. An index of business activity at non-manufacturing businesses, based on a survey by the Institute for Supply Management rose to 49.3 in February -- a sharp rise over January but still indicating a contraction in the service sector.
The January reading of 44.6 had stunned analysts and prompted concern that a severe recession could be in the offing; the more modest contraction in February was a relief. "It tells us growth remains sluggish," said Peter Kretzmer, a senior economist at Bank of America. "It's not alarming like last month's number was."
Also yesterday, the Labor Department said the nation's businesses are becoming more productive, as output per hour worked rose at a solid 1.9 percent annual rate in the fourth quarter. But labor costs per unit of output also rose, suggesting some inflation is occurring.
Since the financial markets entered crisis mode in August and the housing market downturn contracted, leaders of the Federal Reserve have been looking for evidence that ordinary businesses were being affected -- not just home builders and Wall Street banks.
The beige book offered that evidence in spades. The business environment for manufacturers was "mixed, but on the whole, subdued," a conclusion underscored by a Commerce Department report yesterday that factory orders fell 2.5 percent in January.
The Fed report described vehicle sales as "slow or sluggish, with little exception." Trucking, shipping, and other transportation services were off. Banks were tightening the availability of credit in most areas, and demand for loans was stable to dropping.
And not only did weakness continue in the residential real estate sector, but it also showed signs of spreading into commercial real estate -- offices, shopping centers, and the like. Among the precious few signs of life in the national real estate market was from the New York Fed, which reported that "Manhattan's co-op and condo market has shown some resilience."