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Fed Says Expansion Was ‘Moderate’ in May, Hiring Steady

Federal Reserve Bank of Atlanta President Dennis Lockhart
Federal Reserve Bank of Atlanta President Dennis Lockhart. Photographer: Patrick Fallon/Bloomberg

The Federal Reserve said today that the U.S. economy maintained a moderate pace of growth as factory output rose and the real-estate market improved.

“Overall economic activity expanded at a moderate pace” from early April to late May, the Fed said in its Beige Book business survey, which is based on reports from its 12 district banks. “Hiring was steady or increased slightly.”

The report, which gives central bankers anecdotal evidence on the health of the economy two weeks before they meet in Washington, contrasts with recent data showing payrolls grew at the slowest pace in a year in May and manufacturing cooled. Atlanta Fed President Dennis Lockhart said today that an extension of the central bank’s Operation Twist program to reduce borrowing costs is “on the table” following last week’s payrolls figures.

The Beige Book “is clearly at odds with the hard data we’ve been seeing,” said Millan Mulraine, senior U.S. strategist at TD Securities in New York. “We’ve seen a dramatic slowdown in economic growth momentum that you’d think would be reflected in a few, if not the majority, of districts.”

The leadership of the Fed will probably provide more clarity on their views before the June 19-20 meeting. Fed Vice Chairman Janet Yellen will speak tonight in Boston about the economic outlook, and Chairman Ben S. Bernanke will testify before Congress tomorrow.

Prepared to Act

John Williams, president of the San Francisco Fed, said today that policy makers should be prepared to step up stimulus in case growth slows and threatens to delay improvement in the labor market.

The Fed must “stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability,” Williams said today in a speech in Bellevue, Washington. If growth worsened or the inflation outlook fell below the Fed’s goal of 2 percent, “additional monetary accommodation would be warranted.”

U.S. stocks rose, sending benchmark indexes toward their biggest gains this year, on speculation global policy makers will act to revive a slowing economy. The Standard & Poor’s 500 Index advanced 2.3 percent to 1,315.13 at the close of trading in New York. The yield on the 10-year Treasury note climbed for a third day, to 1.66 percent from 1.58 percent late yesterday.

Today’s Beige Book used language similar to the previous report in April, which said the economy “continued to expand at a modest to moderate pace” in all 12 Fed districts. That report also said that “hiring was steady or showed a modest increase across many districts.”

Survey of Economists

A Bloomberg News survey of economists shows the economy is likely to weather slumping stocks, a slowdown in hiring and the European debt crisis. The S&P 500 is down 7.3 percent since its 2012 peak on April 2.

Gross domestic product will increase by 2.2 percent in 2012 and by 2.4 percent in 2013, the median of 70 economists surveyed from June 1 to June 5 shows. The estimates are down 0.1 percentage point from those issued last month.

While the Beige Book said hiring was “steady,” a Labor Department report last week showed that employers added 69,000 workers to payrolls in May, less than half the median estimate in a Bloomberg survey of economists and down from 275,000 in January.

“We’re getting a lot of conflicting information here, and that usually means reality is somewhere in the middle,” Diane Swonk, chief economist for Mesirow Financial Inc. in Chicago, said in an interview on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays.

Today’s Beige Book reflects information collected on or before May 25 and summarized by the Dallas Fed.

Vehicle Sales

Manufacturing “continued to expand in most districts” and vehicle sales “remained strong,” the Beige Book said. Most districts reported gains in production or new orders, except for Philadelphia, Richmond and St. Louis.

Manufacturing in the U.S. grew at a slower pace in May as factories tempered production and pared inventories in response to weakness in the global economy, according to a report last week from the Institute for Supply Management.

The ISM’s factory index fell to 53.5 after reaching a 10-month high of 54.8 in April, the Tempe, Arizona-based group reported June 1. Readings greater than 50 signal growth.

Service Industries

Service industries sustained their pace of growth in May, showing the biggest part of the U.S. economy is withstanding the impact of the European crisis, the Institute said in a separate report yesterday. Their index of non-manufacturing businesses, which covers about 90 percent of the economy, unexpectedly rose to 53.7 last month from April’s 53.5.

“Retail spending was flat to modestly positive in nearly all districts,” the Fed said today, and “demand for nonfinancial services was generally stable to slightly stronger since the previous report.”

Consumer spending rose in April, according to a Commerce Department report last week. Purchases increased 0.3 percent as incomes rose 0.2 percent.

“We still see a consumer out there who is making some tough choices,” Timothy A. Johnson, senior vice president of finance at Columbus, Ohio-based retailed Big Lots Inc., said in an earnings call yesterday. “He is concerned about where the economy currently sits.”

The Fed said that “economic outlooks remain positive, but contacts were slightly more guarded in their optimism.” Manufacturers were concerned “that a slowdown in Europe and domestic political uncertainty may affect future business decisions.”

Housing Recovery

Several districts noted “consistent indications of recovery in the single-family housing market, although the recovery was characterized as fragile.”

The housing market, a laggard in the expansion, may be reviving after a six-year slump in which home prices, sales and construction collapsed.

Starts through the first four months of this year were 24 percent higher than the comparable 2011 period, and home values in 20 cities fell in the 12 months ended March at the slowest pace in more than a year.

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