Fed Report Portrays Stressed Economy

By Neil Irwin
Washington Post Staff Writer
Thursday, July 24, 2008

The economy has continued slowing this summer across most of the nation as prices keep rising sharply, according to a report by the Federal Reserve, indicating that the squeeze that has made times tough for Americans throughout 2008 shows no sign of letting up.

Yesterday's "beige book," a compilation of anecdotal information from businesses around the country published eight times a year by the Fed, gives a portrait of an economy that continues to experience deep stresses from many sides: a soft labor market, banks that are reluctant to lend, higher fuel prices, and consumers hesitant to buy big-ticket items such as autos.

"Consumer spending was reported as slowing or sluggish in nearly all" parts of the country, the beige book said, and all businesses around the nation "characterized overall price pressures as elevated or increasing."

The Fed's report came on another solid day for the stock market, as the Dow Jones industrial average continued its strong run from last week and this one by rising 30 points, or 0.3 percent. A major reason: The price of oil continued falling, offering some relief from the high prices that are walloping corporate profits and consumers' pocketbooks. The price of oil fell $3.98 yesterday, to $124.44 a barrel, the lowest level since early June.

The softness in the economy described in the beige book is almost uniform, aside from some signs of strength in energy-producing states and some agricultural communities. Around the country, consumer spending was weak, despite the economic stimulus checks from the government that went out starting in May. Sales at discount stores in many parts of the country were up, and the tax rebates boosted demand for electronics.

But, "sales at most other types of stores, especially discretionary or housing-related items, were typically characterized as weak or falling." Expectations for sales in the future were "subdued" in the area served by the Atlanta Fed and "grim" in that served by the Dallas Fed.

Tourism to distant locales, such as Hawaii, has suffered, according to the report, though some tourist destinations closer to big cities are benefiting.

The anecdotal reports of weak retail spending are disappointing to economists who have counted on the economic stimulus checks to bolster consumers through this difficult period. Many macroeconomic measures suggest that consumer spending has held up better than the reports of the Fed's business contacts, who were surveyed in late June and the first half of July, would suggest.

"I would say in some sense that consumers are responding rationally," said Brian Bethune, a U.S. economist at consulting firm Global Insight. "Sure they've got these rebate checks, thank you very much, but I'm going to be very careful about when I spend and how and on what."

The housing market remained weak around the country. In a more worrisome sign, the commercial real estate sector, which has been a mainstay of economic growth the past two years, shows new signs of flagging, including locally.

"Boston characterized sentiment in the sector as 'decidedly morose,' and industrial markets were especially weak" in New England, the report said. "Office market conditions in the Richmond District continued to weaken and were 'bleak' in the Washington, DC area."

A constant all over the country was skyrocketing prices for fuel and other commodities. Many companies were planning to pass on more of the costs of higher raw materials into the prices they charge consumers, though not universally.

"Many Districts reported on manufacturers' plans to raise selling prices as a result of higher input prices, with several commenting on fears of a corresponding decrease in customer demand and overall sales volume," the beige book said.

As that happens, it will lead to high inflation numbers and pain for consumers in the short run, but ultimately push people to make the adjustments that are needed to reflect a world of higher prices for raw materials.

"These pass-throughs are in some ways necessary to provoke consumer spending decisions that are rational," Bethune said.

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