Jan. 14 (Bloomberg) -- The U.S. economy weakened further in the past month across almost all regions, hurt by a lack of credit and declines in retail sales, the Federal Reserve said in its regional business survey.

“Most districts noted reduced or low activity across a wide range of industries,” the Fed said today in its Beige Book release, published two weeks before officials meet in Washington to set monetary policy. “Overall economic activity continued to weaken across almost all” regions, the report said.

Today’s Beige Book underscores the picture of a downturn that both private forecasters and Fed officials predict will be the longest since the 1930s. Fed Chairman Ben S. Bernanke and his colleagues are forecast to keep the main interest rate close to zero and explore taking on more assets to unfreeze credit when they meet Jan. 27-28.

“It paints a dire picture of the economy and the consumer,” said Doug Roberts, chief investment strategist for channelcapitalresearch.com, a Shrewsbury, New Jersey-based research firm. Fed policy makers “understand clearly the situation, and are quite aware of the need to not get caught behind the curve.”

The economy will shrink 1.5 percent this year, discouraging Fed policy makers from raising rates until 2010, according to a Bloomberg News survey of economists published yesterday. The contraction is a half percentage point more than projected last month, according to the median of 59 forecasts in the survey.

“Growth declined slightly in the third quarter, but it is likely to record a much sharper decline in the fourth quarter,” Philadelphia Fed President Charles Plosser said today. “The first half of 2009 is not likely to be much better.”

Policy Actions

The central bank cut the main rate to zero to 0.25 percent last month and said it will expand emergency loans if necessary to counter a deepening yearlong recession.

“Retail sales were generally weak, particularly during the holiday season,” the Beige Book said. “Manufacturing activity decreased in most districts” and “services-sector activity generally declined across the districts.”

December sales at U.S. retailers fell 2.7 percent, the sixth consecutive drop, extending the longest string of declines on record, the Commerce Department said today in Washington. Purchases excluding automobiles slumped 3.1 percent, the most since records began in 1992.

Retailers engaged in “deep discounting” during the holidays, with “sizable” price cuts, while wage pressures were “largely contained,” today’s Fed report found.

Deflation Target

Some Fed members are concerned about the possibility of deflation, according to minutes of the December policy meeting released on Jan. 6. The Federal Open Market Committee last month discussed setting an inflation target to discourage expectations that price increases will slow “below desired levels.”

Prices of goods imported into the U.S. fell in December for a fifth consecutive month as commodity costs eased, the Labor Department said today.

Most districts reported lending activity declined or remained weak, with credit conditions tight or getting still tighter, the Beige Book found. The Boston Fed said tight credit was a “major barrier to commercial real estate activity.”

Today’s report was prepared by the St. Louis Fed, based on information collected on or before Jan. 5.

The U.S. economy officially entered a recession in December 2007, the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts, declared last month.

The Beige Book’s regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.

Last Updated: January 14, 2009 15:19 EST