Fed: U.S. Economy Expands at `Modest Pace' in September

The Federal Reserve said the U.S. economy expanded at a “modest pace” in September and early October with little sign of accelerating and companies still hesitant to hire.

Eight Fed banks, including San Francisco and Chicago, reported some form of growth, the Fed said today in its Beige Book business survey by the 12 regional banks, released two weeks before each meeting of central bank policy makers. The Philadelphia and Richmond Fed banks said their economies were “mixed” while the Cleveland region “held steady” and the Atlanta district “remained slow” with falling retail sales.

The report may fail to show the kind of pickup in the economy that would deter policy makers from further easing monetary policy to boost job growth and inflation that’s too slow for the Fed. Chairman Ben S. Bernanke said Oct. 15 that there’s a case for additional stimulus because inflation is too low and unemployment is too high.

“We’re just kind of limping along, with any improvement being anemic,” said Doug Roberts, chief investment strategist at Channel Capital Research, a macroeconomic investment research firm in Shrewsbury, New Jersey.

U.S. stocks rose and the dollar slid the most against the euro since July while reaching a 15-year low versus the yen amid speculation the Fed will pump more cash into the economy to spur growth.

Three-Day Rally

The dollar snapped a three-day rally against the euro, losing 1.6 percent to $1.3956 versus the common currency, and sank to as low as 80.85 yen. The Standard & Poor’s 500 Index increased 1.2 percent to 1,180.06 at 3:08 p.m. in New York after slumping 1.6 percent yesterday for its biggest drop in two months.

Today’s release, which provides an anecdotal snapshot of the U.S. economy, includes a national summary by the Dallas Fed and is based on information collected on or before Oct. 8. The Fed’s Open Market Committee next meets Nov. 2-3 in Washington.

“On balance, national economic activity continued to rise, albeit at a modest pace,” the Fed said in the national summary. Manufacturing expanded, consumer spending was “steady to up slightly” and companies had trouble passing on higher input costs to customers, the report said.

‘Moderate Pace’

In the previous report Sept. 8, the Fed said the economy maintained its expansion while showing “widespread signs of a deceleration” in mid-July through the end of August. Five regional banks reported “economic growth at a moderate pace” and two pointed to “positive developments or net improvements.” The remaining five banks said conditions were mixed or decelerating.

Overall U.S. “hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness,” the Fed said in the report.

The unemployment rate was unchanged at 9.6 percent in September, near the 26-year high of 10.1 percent in October 2009. U.S. employers eliminated 95,000 jobs, compared with the median analyst estimate of a loss of 5,000 jobs; private companies added 64,000 workers, below estimates of 75,000.

The Fed said that even with “slightly” higher production costs, final prices for goods and services were “stable” across the country. Still, “there were scattered reports of increases” at manufacturers and restaurants, and the Fed received “widespread reports” that companies anticipated higher employee-benefit costs because of changes to health-care law.

Preferred Gauge

Inflation, measured by central bankers’ preferred gauge of the personal consumption expenditures price index, minus food and energy, has been below the Fed’s goal for five consecutive months. The price measure rose 1.4 percent for the 12 months ending August. Bernanke last week cited the index’s 1.1 percent annual pace for the first eight months of 2010. Fed officials’ long-term preferred range for the inflation rate is about 1.7 percent to 2 percent.

Consumer spending was “flat to moderately positive” in most regions, the Fed said. “Retailers said consumers are slowly regaining confidence, but remain price-conscious and were largely limiting purchases to necessities and nondiscretionary items.”

Some districts reported gains in household goods and apparel, and some firms in the New York area planned to hire more staff for the holiday shopping season, the Fed said.

Sales Climbed

Retail sales in the U.S. climbed 0.6 percent in September, more than forecast, following a 0.7 percent gain in August that was larger than previously estimated. At the same time, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 67.9 this month, the lowest since July, from 68.2 in September.

“What you seem to have is a disconnect between the economy and markets, where companies are adjusting to the new environment and cutting to the bone, but still able to make their numbers,” Roberts said. Meanwhile, the liquidity being provided by the Fed’s actions is “benefitting larger businesses primarily” and not helping consumers as much.

Housing markets were “weak,” with “sluggish or declining” sales in many regions, the Fed said. There were “scattered reports of some improvement.” “Respondents’ outlooks suggested sales and construction would remain subdued through year-end,” restrained in part by lending standards and “general economic uncertainty,” the Fed said.

More Homes

Data released this month showed that builders in the U.S. began work on more homes in September than economists expected, with housing starts at a 610,000 annual rate. Still, that’s less than one-third of the record 2.3 million pace in January 2006. The housing market, in both construction and sales, “remains depressed,” New York Fed President William Dudley said yesterday.

Business demand for loans “remained weak” and commercial real estate lending was “subdued,” the Fed said. For consumers, “lending was sluggish, but there were scattered reports of improvement,” the Fed said.

Bernanke said last week that large companies “in good financial condition can obtain credit in capital markets easily and on favorable terms,” while smaller firms “continue to face significantly greater problems in obtaining credit” because of weaker balance sheets and “tight lending standards.”

Manufacturing expanded in most regions, with several reporting production or order increases “across a wide range of industries,” the Fed said. Exports helped activity in the Cleveland, Chicago, and Kansas City regions, the Fed said.

That compares with data showing production in the U.S. dropped 0.2 percent in September, the first decline in more than a year, according to figures from the Fed earlier this week. Capacity utilization, which measures the amount of a plant in use, decreased to 74.7 percent last month from 74.8 percent in August. The gauge averaged 80 percent over the past 20 years.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net Vivien Lou Chen in New York at vchen1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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Federal Reserve Chairman Ben S. Bernanke

Andrew Harrer/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve.

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

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