Fed survey finds faint signs of hope

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(Agencies)
Updated: 2009-04-16 09:20

In this March 27, 2009 photo, a sold sign is posted outside a home in Cincinnati. [Agencies]

WASHINGTON – The Federal Reserve said Wednesday there are some faint signs the steep plunge in economic activity that began last fall is starting to level off.

The Fed's latest survey of business conditions nationwide found five of its 12 regional banks reporting a moderation in the pace of the economic decline.

Several regions "saw signs that activity in some sectors was stabilizing at a low level ... (but) overall economic activity contracted further or remained weak," the Fed said.

The survey, known as the Beige Book, struck a slightly more positive tone than last month's report, which described an economy plunging rapidly after the financial shocks that occurred last fall.

Both President Barack Obama and Federal Reserve Chairman Ben Bernanke on Tuesday mentioned some recent signs of progress while cautioning that the recession was far from over.

Information in the new Fed survey underscored that view. The report listed a host of problems in the manufacturing, home building, and travel and tourism sectors, but noted some faint signals that the steep fall in activity was starting to moderate.

In one sign of a possible rebound, the report said while home prices and new home construction declined in most parts of the country, the number of people shopping for homes was beginning to rise, leading to a scattered pickup in sales in a number of districts.

The Fed also said several districts observed a slowdown in the pace of manufacturing declines. The Cleveland, New York and Dallas regions reported a leveling off in the pace of declines in new orders.

The nation's job market, though, is not improving. "Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across districts," the report said.

The Fed found a silver lining in that as well, noting that the job losses have eased worries about inflation being generated by rising wage pressures.

The report also said the credit squeeze that has occurred as banks suffered mounting loan losses did not show any significant improvement. Demand for business loans remains weak.

Still, private economists said the new Fed survey reinforced a slightly more upbeat view on the economy.

"This is good evidence that activity is becoming less bad across the country," said Jennifer Lee, an economist at BMO Capital Markets. "Granted, things are still bad, but less so."

The new survey was based on information each of the regional banks collected in March and early April. It will be used when Fed policymakers next meet to consider their stance on interest rates and other monetary issues on April 28-29.

The Fed is widely expected to keep a key interest rate at a record low of near zero while continuing to supply massive amounts of money to the banking system in the hopes of combatting the worst financial crisis to hit the country in seven decades.

The Fed report said that retail spending remained sluggish but that some districts had seen a slight improvement in sales compared with the previous reporting period.

A rebound in consumer spending is critical since consumers account for about 70 percent of total economic activity. Consumer spending plunged at an annual rate of 4.3 percent in the final three months of last year, the biggest decline in 28 years. That was the major factor leading the overall economy, as measured by the gross domestic product, to contract at an annual rate of 6.3 percent, the worst showing since 1982.

Even though retail sales retreated a bit in March, private economists expect consumer spending to be slightly positive in the first quarter. A small rebound in spending should trim the overall GDP decline in the January-March period to around 5 percent.

However, analysts believe the current quarter should show a slightly slower rate of retreat, with GDP growth perhaps turning slightly positive by the third quarter.

Even if the current recession, which is expected to become the longest downturn in the post World War II period, does end in the second half of this year, economists say unemployment will keep rising until probably this time next year.

The jobless rate hit a 25-year high of 8.5 percent in March, a month when businesses cut another 663,000 jobs. So far in this recession, which began in December 2007, a net total of 5.1 million jobs have been lost.