Fed Saw Modest to Moderate Growth in June on Consumer Spending

The Federal Reserve said economic growth was modest to moderate as all 12 of its districts reported stronger consumer spending and expanded manufacturing, and a third saw “robust to very strong” auto sales.

“Retail sales grew modestly in most districts, with increases that were generally similar to the previous reporting period,” the Fed said today in its Beige Book business survey, which is based on reports from its regional reserve banks. The metal and auto industries “generally reported positive growth” while manufacturers in four districts saw “increased demand for their products from the energy sector.”

Five districts reported “moderate” growth in June and July, down from seven in the prior report, while the remainder said they had “modest” expansions based on reports collected before July 7. Many regions saw growth for professional and business services, including health-care consulting, advertising, engineering, accounting and technology.

An unexpectedly fast decline in the jobless rate is putting pressure on the central bank to consider moving up the timing for the first increase in the main interest rate since 2006. Fed Chair Janet Yellen told a House panel today that rates will probably stay low for a “considerable period” after the central bank halts bond purchases, most likely in October.

The Beige Book provides the Federal Open Market Committee anecdotal information about the economy two weeks before its July 29-30 policy meeting. The FOMC last month continued slowing the monthly pace of purchases for a fifth straight meeting, with a $10 billion cut to $35 billion.

Job Market

The Fed said labor markets improved with all regions showing “slight to moderate employment growth.” Several noted “some difficulty finding workers for skilled positions.” Wage pressures “remained modest” in most districts.

Inflation was generally contained, with “slight to modest price increases for both inputs and finished goods” in most districts. Reserve banks cited higher prices for meat, dairy products, construction materials and some metals.

The report showed tourism expanded in all regions, with four citing “robust activity” at hotels. Transportation firms saw “broad-based demand for trucking and rail services” and ports in the Richmond district has “strong growth” in container traffic.

Real estate reports varied. Many districts reported low inventories and rising home prices along with “mixed” demand. Commercial construction generally strengthened across the U.S. because of higher demand and low vacancy rates.

Yellen’s Testimony

Fed officials have held the main interest rate near zero since December 2008 and more than quadrupled their balance sheet to a record $4.38 trillion. Yellen told lawmakers in her semi-annual testimony that the Fed must keep up its unprecedented monetary stimulus to combat persistent job-market weakness.

“A high degree of monetary policy accommodation remains appropriate,” Yellen said in written testimony to the House Financial Services Committee identical to comments yesterday to the Senate Banking Committee. “Although the economy continues to improve, the recovery is not yet complete.”

Yellen highlighted weaknesses in the labor market even after the jobless rate declined last month to an almost six-year low of 6.1 percent, close to the level most Fed officials predicted for the end of the year.

Payrolls surged by 288,000 workers, boosting the average gain this year to almost 231,000 a month and putting jobs on pace for the biggest annual gain since 1999.

Wage Growth

Still, Yellen said yesterday that low wages signal “significant slack” in labor markets while commenting on the “psychological trauma” from unemployment to citizens and their families.

Economists expect the economy to rebound after contracting 2.9 percent in the first quarter, the sharpest plunge in five years. Growth will be 1.7 percent this year and 3 percent in 2015, according to estimates in a Bloomberg survey.

A pickup in inflation toward the central bank’s 2 percent objective has also prompted some officials to say the Fed may have to consider tightening sooner. The Fed’s preferred gauge, the personal consumption expenditures index, rose 1.8 percent from a year earlier in May, the most in 19 months.

Dallas Fed President Richard Fisher, who votes on policy this year, said in a speech today the central bank may need to start raising rates “early next year, or potentially sooner depending on the pace of economic improvement.” He said in Los Angeles he’s “increasingly concerned about the risks of our current monetary policy” amid a “rapidly improving employment picture” and recent increases in inflation.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray, James L Tyson

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