U.S. Economy Remains Weak, Fed Finds

Soft Real Estate Market, Pricey Commodities Continue to Stress Businesses

The economy has remained weak across most of the nation, according to anecdotal reports from businesses collected by the Federal Reserve, despite some recent positive signs in economic indicators.

According to the Fed's "beige book," released yesterday, business conditions were "weak," "soft," or "subdued" across most of the country. Businesses reported strains brought on by a battered real estate market, tapped-out consumers and stubbornly high prices for staples.

"The economy is stabilizing, but at a very low level," said John Silvia, chief economist for Wachovia. "We're still losing jobs. We're not out of the woods at all."

The Fed's policymaking committee is almost certain to leave interest rates unchanged when it meets on Sept. 16, reflecting continued weak growth and an easing of commodity prices in recent months. At its previous two meetings, the Fed left the rate at which banks lend to each other at 2 percent.

"Consumer spending was reported to be slow in most districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending," said the beige book, which compiles reports from companies across the country.

Tourism was reported to be weak in Hawaii, demand for auto parts diminished in New England, and residential construction in parts of the Midwest rapidly declined. Sales of furniture and household appliances were weak almost everywhere, and auto sales were falling, especially for SUVs and trucks.

In the past two weeks, indicators on the health of the economy have been better than initially forecast. Gross domestic product grew a surprisingly strong 3.3 percent in the second quarter, and yesterday the Commerce Department reported that new orders to factories rose 1.3 percent, considerably better than the 0.8 percent gain economists were expecting.

Indeed, there were glimmers of hope in yesterday's Fed report, captured in the weeks leading up to Aug. 25. Its language about the business environment, while dour, has been little changed in the past six months. That suggests that while the economy is weak, it is not experiencing a new major dip. And the report featured scattered bright spots in the economic outlook, including in the agricultural, energy, and mining sectors, and from international tourism.

"Energy and mining activity were strong and expanding in all of the districts that reported on those sectors," the beige book said, reflecting continued high prices for raw materials.

The real estate sector, however, remained dismal, as conditions "weakened or remained soft" in every part of the country except Plains states served by the Federal Reserve Bank of Kansas City. Commercial construction showed signs of weakening in all parts of the country except Texas and surrounding states -- likely because oil and natural gas production in that area has boosted the regional economy.

Prices remained high across the nation, but there are some signs that the pressures are abating as the prices of oil and other commodities begin to fall on global markets. "Business contacts in a number of districts indicated that they had increased selling prices in response to the high costs for their inputs," but wages were not rising rapidly, given the soft labor market, the report said.

"Businesses have a high level of uncertainty about what future sales are going to be, what their access to credit will be," Silvia said. "Given that uncertainty, it's not surprising that many are reluctant to invest and hire workers."