Fed Saw Modest to Moderate Growth as Labor Market Improved

The Federal Reserve said the economy expanded at a modest to moderate pace last month as auto sales led household spending and the labor market improved.

“Consumer spending expanded across almost all districts,” the report said today. “Labor market conditions generally strengthened” with “hiring activity steady to stronger” in most of the U.S.

Seven of 12 districts saw “moderate” growth, with the rest characterized as “modest,” the Fed said in its Beige Book business survey, which is based on reports from its district banks.

The survey, released two weeks before policy makers meet in Washington, supports Chair Janet Yellen’s view that the economy is rebounding from a 1 percent contraction in the first quarter caused largely by harsh winter weather. Fed officials are watching the labor market as they move to complete their bond-purchase program late this year and start considering the timing of the first interest-rate increase since 2006.

“It basically tells us the economy has recovered to a significant degree from the harsh winter,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York and a former Richmond Fed economist. “It argues for steady policy: continued low rates and $10 billion tapering” in monthly bond purchases.

Stocks remained higher after the report, with the Standard & Poor’s 500 Index adding 0.2 percent to 1,927.20 at 2:38 p.m. in New York. The yield on the 10-year Treasury note increased 0.01 percentage point to 2.61 percent.

Rebound Seen

Policy makers, including Kansas City Fed President Esther George, are predicting the economy will bounce back after harsh winter weather kept consumers at home and disrupted production in many regions.

“Demand for both products and services is likely to rise, supporting overall growth on a more sustained basis,” George said yesterday.

Growth accelerated in the Cleveland and St. Louis districts and slowed slightly in Kansas City, the Fed said today.

The report also said that manufacturing “expanded throughout the nation” and transportation “strengthened in most districts” with ports showing “brisk growth” along the Southeastern coast.

“Labor-market conditions generally improved,” the Fed said. “Several districts continued to report that employers were having difficulty finding skilled workers. Most districts reported that wage pressures remained subdued,” although “an increase in the cost of health insurance was noted in Chicago and Dallas.”

Job Report

The U.S. probably added 215,000 jobs in May, and the unemployment rate may have risen to 6.4 percent, according to the median estimates of economists surveyed before a government report in two days. Most Fed officials project full employment to be an unemployment rate of 5.2 percent to 5.6 percent.

An improving job market is helping to propel demand for new cars, according to the Beige book, with more than half of districts reporting strong sales.

On the other hand, real-estate activity “was mixed across the country, with some reports of low inventories constraining sales,” the Fed said. Residential construction was “mixed,” while “multi-family construction remained particularly robust.”

Loan demand increased, and “lenders competed vigorously on rates and terms for high-quality borrowers,” and “some financial institutions relaxed underwriting standards.”

Fastest Pace

Service industries expanded in May at the fastest pace in nine months amid rising orders, a separate report showed today. The Institute for Supply Management’s non-manufacturing index climbed to 56.3 last month from 55.2 in April, the Tempe, Arizona-based group said. Readings greater than 50 signal expansion.

Consumer demand contributed to a wider trade deficit in April, Commerce Department figures showed today in Washington. The deficit ballooned to the widest in two years as Americans bought record amounts of consumer goods, business equipment and automobiles from abroad.

The Federal Open Market Committee in April trimmed monthly bond purchases for the fourth straight meeting and said further “measured” cuts were likely. At the same time, the panel affirmed its commitment to a “highly accommodative” policy.

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