Fed’s Beige Book Shows Measured Economic Growth

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.”

“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 (SPX) 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.

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.

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.

Via – Bloomberg

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