Hopeful Economic Signs Emerge From Fed's ‘Beige Book' Survey

By Annys Shin
Washington Post Staff Writer
Thursday, July 30, 2009

The U.S. economy's downward slide is slowing, with more regions seeing signs of stabilization since mid-June, according to the Federal Reserve's latest snapshot.

The Fed's "beige book," a compilation of impressions from businesses across the country that was released Wednesday, offered a brighter assessment than a previous report, which suggested that the economy continued to deteriorate in April and May.

"It anecdotally confirms what the economic indicators have been telling us," said Bernard Baumohl, chief global economist with the Economic Outlook Group. "The economy is transitioning from recession to recovery."

Business spending also appeared to be staging a slow comeback, according to a separate report released by the Commerce Department on Wednesday. Orders for durable goods -- appliances, construction equipment and other items made to last at least three years -- fell more than expected in June, mainly due to a drop in demand for airplanes and autos. But excluding aircraft, new orders rose by a surprising 1.1 percent, the second straight monthly increase and one that is significantly larger than the rise in May. Orders for non-defense capital goods excluding aircraft, a closely watched barometer of business investment, made gains for the second consecutive month.

The durable goods report "doesn't suggest business spending is going to come roaring back," said Wells Fargo economist Tim Quinlan. "You've had corporate belt-tightening for the first five months of the year, and we're finally starting to see business build back essential stockpiles. It's probably just rebuilding core supplies rather than planning for future growth."

The beige book covered a six-week period since the release of the last survey on June 10 and was prepared in advance of the Aug. 11 and 12 meeting of the Federal Open Market Committee, the Fed's policy-setting arm.

That panel is not expected to alter the Fed's strategy for reigniting growth, which has involved keeping a key interest rate it controls close to zero and buying hundreds of billions of dollars in government and mortgage-related debt to help lower consumer borrowing costs.

The latest beige book survey gave the central bank little reason to change course. Though the report said business travel was down, foot traffic in retail stores was slow and many businesses were reluctant to take out loans, it also contained some hopeful signs.

The threat of inflation appeared to be in check, with most Fed districts reporting that "upward price pressures were minimal." Economists and investors have grown increasingly worried that rising deficits and the Fed's aggressive monetary policy could spark inflation.

Several districts said that residential real estate markets improved modestly, fueling hopes that the three-year decline in the housing sector might be ending. A separate report issued earlier this week by Standard & Poor's/Case-Shiller shows that an index of home prices for 20 U.S. metropolitan areas rose in May for its first monthly increase since 2006.

Fed districts in the industrial Midwest also reported that manufacturing activity was either picking up or its decline was slowing. The outlook of manufacturers improved despite the continued troubles of U.S. automakers. General Motors and Chrysler each closed plants recently as part of restructuring efforts.

The need to rebuild inventories will likely help the economy pull out of recession this year, Quinlan said, at least on paper. But conditions for workers are likely to remain badly depressed for some time until the economy starts adding enough jobs to reduce unemployment.

The Labor Department reported Wednesday that unemployment in the Washington region increased to 6.6 percent in July, up from 6.2 percent in May and 3.8 percent a year ago. The national rate is 9.5 percent and is expected to top 10 percent by year's end.

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