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Fed survey: Stabilization seen in some regions

July 30, 2009|Annys Shin | Shin writes for the Washington Post.

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 of the economy.

The Fed's so-called beige book, a compilation of impressions collected from businesses across the country and released Wednesday, offered a brighter assessment than a previous report, which suggested that the economy overall 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 goods made to last at least three years -- fell more than expected in June, mainly because of a drop in demand for airplanes and autos.

But excluding aircraft, new orders rose by a surprising 1.1%, the second straight monthly increase and significantly larger than the increase in May. And orders for non-military capital goods excluding aircraft, a closely watched barometer of business investment, rose for the second consecutive month.

The durable goods report "doesn't suggest business spending is going to come roaring back," Wells Fargo economist Tim Quinlan said. "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 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 beige book survey gave the Fed little reason to change course. It found that business travel was down, foot traffic in stores was slow and many businesses were reluctant to take out loans, but it also contained some hopeful signs.

The threat of inflation appeared to be in check, with most of the Fed's 12 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 residential real estate markets improved modestly, fueling hopes that the 3-year-old decline in the housing sector may be coming to an end. A separate report issued this week by Standard & Poor's/Case-Shiller showed that home prices in 20 metropolitan areas rose during the three months ending in May for the first time 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 Co. and Chrysler each closed plants in June as part of their restructuring efforts.

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

The Labor Department has reported that unemployment in the nation is 9.5% and is expected to top 10% by year's end.

Most Fed regions reported "sluggish" retail activity, with shoppers continuing to be price-conscious.

But the Fed regions of Boston, Kansas City and San Francisco reported either "modest sales increases or less negative sales results," the Fed said. The Philadelphia, Atlanta, St. Louis, New York and Dallas regions reported "flat or mixed sales." The remaining Fed regions described them as "soft."

Meanwhile, auto sales were mixed across the country, while travel and tourism was down in a majority of the regions.

In the factory sector, reports overall suggested that activity "remained subdued" but "slightly more positive" than in the previous survey.

Manufacturing activity showed "some improvement" in the Chicago, Kansas City and Richmond, Va., regions. The regions of St. Louis and Dallas said the rate of decline in factory activity was moderating. The Philadelphia and Minneapolis regions saw manufacturing activity drop, while the rest of the regions described activity at "low levels."

Residential real estate remained soft in most Fed regions, although "many noted some signs of improvement." By contrast, commercial real estate activity weakened further.

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The Associated Press was used in compiling this report.

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