Fed: US Hit By Double Whammy Of Slower Grow, Rising Prices

Source : The Straits Times, July 24, 2008

WASHINGTON - THE United States slogged through slower economic growth and rising prices during the summer, packing a double whammy to consumers and businesses alike.

The Fed's new snapshot of business conditions, released on Wednesday, also underscored the challenges confronting Federal Reserve Chairman Ben Bernanke and his colleagues as they try to get the economy back on track.

For now, many economists predict the Fed will probably leave a key interest rate alone when it meets next on Aug 5 - given all the economic crosscurrents. Boosting rates to fend off inflation would hurt the fragile economy and the already crippled housing market. On the other hand, the Fed isn't inclined to lower rates because that would aggravate inflation.

Growth and inflation barometers turned worse in the summer, according to the Fed report. Some worry that the US may be headed for a bout of stagflation, that toxic combination of stagnant growth and stubborn inflation last seen in the 1970s.

Mr Bernanke has said, however, that he doesn't believe the economy will suffer from stagflation.

Information from the Fed's 12 regional banks around the country suggested that 'the pace of economic activity slowed somewhat since the last report' issued in June, the Fed report said.

Consumer spending - the economy's lifeblood - was reported as 'sluggish or slowing' in nearly all the 12 Fed regions, although the government's tax rebate checks spurred sales for some items, especially electronics. Sales at many other stores, particularly for housing-related goods, were typically characterised as 'weak or falling', however.

Looking ahead, 'the outlook for retail activity was also generally downbeat', the Fed report said. Sales expectations were described as 'grim' among retailers in the Dallas Fed region and 'subdued' in the Atlanta region.

Auto sales, meanwhile, were characterised as 'almost uniformly weak' across all Fed regions. Sales were especially poor for gas-guzzling SUVs, trucks and some minivans.

On the manufacturing front, activity declined in many Fed regions. Production of housing-related goods, such as construction equipment, wood products, home furnishings and heating and cooling systems were particularly hard hit. On the positive side, though, overseas demand for US exports remained 'generally high'.

The drooping value of the dollar, which makes US-made goods and services cheaper and more attractive to foreign buyers, has helped to boost export growth. That export growth has been a key force keeping the economy afloat.

The Dallas region noted strong overseas sales of high-tech products. The Fed regions of Cleveland, Richmond, Chicago and Kansas City all reported continued high demand for exports.

Meanwhile, food manufacturers in the Fed's San Francisco region said they are continuing to operate at, or near, full tilt because of persistently high demand.

Turning to inflation, all Fed regions described 'overall price pressures as elevated or increasing', the Fed report said.

Businesses continued to be hit by rising prices for fuel, metals, food and chemicals, among other things. Many Fed regions said manufacturers planned to raise prices to customers as a way of coping with the higher production costs. Some worried about a drop in customer demand and overall sales volume because of price hikes.

Some companies in the Philadelphia Fed region indicated that sluggish demand has made it difficult to raise prices. Meanwhile, some businesses in the Atlanta region were hesitant to pass along their higher costs as price increases because of cutbacks in discretionary spending by consumers.

Retail prices went up in several Fed regions. In the Kansas City region, for instance, companies reported higher prices at hotels, restaurant and resorts. Chicago retailers reported raising prices charged to consumers in response to higher wholesale prices.

By contrast, the Fed regions of New York and Cleveland reported relatively stable retail prices. One major retail chain in New York said that while costs under existing contracts were not up substantially, 'some escalation in prices was expected within the next year', the Fed report said.

The government last week reported that consumer prices in June rose at the second-fastest pace in a quarter century. Wholesale prices went up sharply, too.

On the jobs front, most Fed regions said employment conditions were about the same or slightly weaker. Employers have cut jobs for six straight months as they try to keep work forces lean amid the economic slowdown. Housing, credit and financial problems all have weighed on growth. The unemployment rate, at 5.5 per cent in June, is expected to climb in the months ahead.

Wage pressures, meanwhile, were described as 'generally modest'. Economists look to wages for clues about inflation.

Businesses in the Fed regions of Cleveland, Atlanta, Chicago and Kansas City reported very little upward wage pressures, except for very skilled workers and those in the energy field. But the Boston and Dallas regions said more workers were requesting higher wages to supplement cost of living increases.

Mr Bernanke has said he doesn't see a repeat of the 1970s-style situation where workers demanded - and got - higher wages to keep up with ever-rising prices. But Mr Charles Plosser, president of the Federal Reserve Bank of Philadelphia, has warned that the Fed shouldn't wait for signs of something like that to emerge before taking corrective action.

Mr Plosser, an inflation hawk, has warned that the Fed might need to start to raise rates sooner rather than later to thwart inflation - even if the economy stays fragile.

The Fed's survey is based on information supplied by the its 12 regional banks. The information was collected before July 14. -- AP