Fed Sees Measured Economic Growth as Fiscal Cliff Nears

Fed Sees ‘Measured’ Economic Expansion as Fiscal Cliff Nears
Customers shop for work boots and shoes at a Sears store in Torrance, California. Photographer: Patrick Fallon/Bloomberg

The U.S. economy expanded at a “measured pace” in recent weeks as gains in consumer demand and housing were tempered by a slowdown in manufacturing and the impact of superstorm Sandy, the Federal Reserve said.

“Consumer spending grew at a moderate pace in most districts, while manufacturing weakened,” the central bank said in its Beige Book business survey, which is based on reports from the Fed’s 12 district banks. “Contacts in a number of districts expressed concern and uncertainty about the federal budget, especially the fiscal cliff.”

The report indicates that Fed policy makers are unlikely to curtail monthly purchases of $40 billion in housing debt to boost the three-year economic expansion. It also bolsters Fed Chairman Ben S. Bernanke’s view that an agreement on reducing long-term federal budget deficits without abrupt tax increases and spending cuts would remove a barrier to growth.

The Fed is “trying to convey that growth is ongoing but not sufficient,” said Drew Matus, senior U.S. economist with UBS Securities LLC. The central bank will continue its $40 billion monthly purchases of mortgage-backed securities and begin outright purchases of Treasury bonds when their current maturity extension program ends in December, Matus said.

The Beige Book provides anecdotal evidence on the health of the economy two weeks before the Federal Open Market Committee meets in Washington on Dec. 11-12. In its prior report, the Fed said that “economic activity generally expanded modestly.”

‘Bright Spot’

“Even if the fiscal cliff does happen, housing is still a bright spot and this Beige Book confirms that,” said Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “The economy has never really caught fire, and we still have the same weak spots like manufacturing slowing.”

The Standard & Poor’s 500 Index extended gains after the report, rallying 0.6 percent to 1407.07 at 3:30 p.m. in New York. The yield on the benchmark 10-year Treasury slumped 0.02 percentage point to 1.62 percent.

The Fed said “widespread disruptions” caused by superstorm Sandy contributed to weaker conditions in the New York region and exacerbated the “general weakness” around Philadelphia. Retailers in New York expect to make up business lost because of the storm, which also helped strengthen sales at home and garden stores in the Richmond Fed district.

100 Deaths

The storm made landfall Oct. 29 near Atlantic City, New Jersey, and killed more than 100 people in 10 states. The worst damage was concentrated around one of country’s most densely populated regions: New York City and the New Jersey coast.

While the storm may reduce gross domestic product in the final three months of this year, the loss may be reversed in 2013 amid continued rebuilding, according to economists at Goldman Sachs Group Inc. and Economic Outlook Group LLC.

The Fed said today that seven of 12 districts reported “either slowing or outright contraction in manufacturing” as some contacts “expressed concern about the outlook for 2013, in part, due to the uncertainty regarding the outcome of the fiscal cliff.”

Failure to avoid the $607 billion in tax increases and spending cuts set to take effect in January is a “substantial threat” to the recovery, Bernanke said in a Nov. 20 speech.

The Beige Book reported “modest improvements” in hiring. “Labor markets were generally described as improving modestly by Boston, Atlanta, Chicago, Minneapolis, and Dallas,” it said.

Record Easing

The FOMC said on Oct. 24 it plans to continue record easing “for a considerable time after the economy strengthens.” Policy makers have said monthly bond purchases will continue until the labor market improves “substantially.”

Consumer spending in most districts increased at a moderate pace. Consumer lending rose in some districts amid higher demand for home mortgage loans and car loans. San Francisco businesses saw “significant sales gains for consumer technology products” as Atlanta noted “strong” car sales.

The report was compiled by the Richmond Fed and based on information collected before Nov. 14.

U.S. businesses have held back on hiring and investment because of the cloudy outlook for U.S. fiscal policy, Bernanke said in his Nov. 20 speech.

The unemployment rate rose to 7.9 percent in October as employers added 171,000 jobs. This month the economy will probably add 100,000 jobs and unemployment will remain at 7.9 percent, according to the median estimate of economists in a Bloomberg Survey.

New Year

At the same time, “a plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy,” Bernanke said last week.

The economy has gained strength from a recovery in housing, the industry at the heart of the 2007-2009 recession and financial crisis. The S&P/Case-Shiller index of property values in 20 cities advanced 3 percent in September from a year earlier, the most since 2010.

Housing continued to show signs that it’s becoming a bigger pillar of strength for the economy as “construction and commercial real estate activity generally improved across districts,” according to the report. Home values continued to improve in most districts, while half of them “noted declining or tight inventories,” according to the report.

Builders in the Richmond district saw “significant pent-up demand in the first-time buyer segment” and more work on high-end homes for the first time in three years. Atlanta noted slight gains in home sales from a year ago and that investors “were more active in Florida” than elsewhere in the district. Cleveland said new single-family home construction increased.

Mortgage Rates

Construction of new homes rose in October to the highest level in more than four years as builders broke ground on 894,000 homes at an annual pace. With mortgage rates at a record low, confidence among U.S. homebuilders climbed in November to a six-year high, according to a National Association of Home Builders/Well Fargo index.

The optimism has spread to consumers, whose confidence in November reached a four-year high, according to the New York-based Conference Board. Consumer spending accounts for 70 percent of the economy.

Download: Hennessey Skeptical For a Fiscal Cliff Agreement


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