The Federal Reserve said the economy expanded at a “steady pace” in most of the U.S. while slowing in four of 12 regions as consumers contended with higher food and fuel prices and shortages of parts reduced auto production.
Reports from the Fed’s district banks “indicated that economic activity generally continued to expand since the last report, though a few districts indicated some deceleration,” the Fed said today in its Beige Book survey of the economy in Washington.
Manufacturing “continued to expand in most parts of the country,” while slowing in some areas. Consumer spending was “mixed,” it said, while the job market improved “gradually across most of the nation.”
The report underscores Chairman Ben S. Bernanke’s statement yesterday that the central bank should maintain record stimulus to bolster a “frustratingly slow” recovery. He predicted that the economy will pick up in the second half of the year as energy prices moderate and factory disruptions ease as suppliers of parts from Japan recover from an earthquake and tsunami.
Stocks maintained losses after the report, with the Standard & Poor’s 500 Index declining 0.5 percent to 1,278.96 at 3:19 p.m. in New York. The yield on the 10-year Treasury note fell four basis points, or 0.04 percentage point, to 2.96 percent.
“This really doesn’t sound like the Beige Book of an economy that is halted and going in reverse,” said John Canally, an economist and investment strategist at Boston-based LPL Financial Corp. “It’s by no means booming, but it does sound like the temporary factors are a big part of what we saw in the data the last six weeks.”
The previous anecdotal survey, released April 13, said that the economy “generally continued to improve,” and that in most districts gains were “widespread across sectors.” Today’s report was compiled by the New York Fed based on information collected before May 27 by the Fed’s 12 district banks.
The central bank is due to complete $600 billion of Treasury purchases this month to boost the economy, and Bernanke has indicated it will continue to reinvest proceeds from maturing assets to keep its balance sheet from shrinking.
Manufacturers remained “generally optimistic about the outlook, although less so than the last report,” the Fed said in its anecdotal survey of the economy released two weeks before meetings of the policy-setting Federal Open Market Committee.
Economists have pared their estimates for growth, forecasting the world’s largest economy will expand at a 2.7 percent annual pace this year, according to the median estimate in a Bloomberg News survey conducted from May 2 to May 12. That compares with a 2.9 percent median projection in April.
The slowing economy has pushed Treasury yields near their lowest levels of the year. The 10-year yield has fallen from the 2011 high of 3.74 percent on Feb. 8.
History shows that recoveries take longer when they follow financial crises, according to the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” by economists Carmen Reinhart and Kenneth Rogoff. The authors traced similarities among crises in 66 countries dating back to Medieval times, including government defaults, banking panics and inflationary surges.
Today’s Beige Book report portrayed the economy weathering the tornadoes and flooding in the South. The Atlanta Fed said that “the late April tornadoes in several states and flooding on the lower Mississippi River had a significant impact on economic activity in the directly affected areas, but no major damage to the energy or transportation infrastructure was reported.”
Manufacturing expanded in all but two districts, “although many noted that the pace of growth had slowed,” the report said. “Activity in the non-financial service sectors continued to strengthen in most Districts, with the notable exception of St. Louis, which reported fairly widespread declines.”
Supply disruptions following the earthquake and tsunami in Japan reduced the flow of new automobiles and held down sales in some districts, the report said. High-tech firms in Dallas and Boston reported shortages of parts following the disaster. The Atlanta district noted that lost production would likely be made up later in the year.
Manufacturing expanded in May at the slowest pace in more than a year, reflecting higher costs of commodities and an interruption in the supply of parts after Japan’s earthquake, according to a report from the Institute for Supply Management.
“Most Districts reported gradual improvement in labor market conditions since their last reports,” the Fed said, and six districts, including Boston and San Francisco, said the labor market has “tightened for workers with specialized technical skills, particularly in the healthcare and technology sectors.”
Honda Motor Co., Japan’s third-largest carmaker, said May 27 that its North America and China vehicle production will return to normal in August as parts suppliers recover from Japan’s earthquake. In the U.S., only production of Honda’s Civic cars will continue to be slowed by limited supplies of some parts, the Tokyo-based company said in a statement. Production of the 2012 Civic, which went on sale in April, will be at about 50 percent, it said.
Jobless Rate Climbs
The unemployment rate unexpectedly climbed to 9.1 percent in May and payrolls grew at the slowest pace in eight months, a Labor Department report showed last week. Employers added a less-than-projected 54,000 jobs last month, after a revised 232,000 gain in April that was smaller than initially estimated. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000.
“Wage pressures were reported to be largely contained in most Districts, as abundant labor availability has continued to limit the pace of wage growth,” the Fed said.
Prices for producers “continued to increase in most regions,” the report said, while prices for consumers “increased only modestly, except for food and energy prices, which continued to escalate.”
The Fed’s preferred price measure, which excludes food and fuel, was up 1 percent from a year earlier in April. Including all items, prices rose 2.2 percent. A separate measure from the Bureau of Labor Statistics shows prices rose 3.2 percent in April, the most since October 2008.
The report noted that “residential real estate sales markets showed continued weakness in most Districts, while rental markets strengthened.”
“No district indicates a general increase in home prices,” the Fed said.
The FOMC next meets June 21-22 in Washington and Bernanke is scheduled to hold his second press conference following the FOMC’s statement on June 22, just a week before the scheduled end of the central bank’s $600 billion bond purchase program.