Fed’s Beige Book Shows ‘Modest to Moderate’ Growth in U.S.

The economy expanded at a “modest to moderate” pace in 11 of 12 Federal Reserve districts, with broad-based gains ranging from business services to construction and manufacturing, the central bank said today.

“Hiring increased at a measured pace in several districts, with some contacts noting difficulty finding qualified workers,” the Fed said in its Beige Book business survey, which is based on reports from its regional banks. Growth in the Dallas Fed district was described as “strong.”

Fed officials will consider the report as they continue a debate on when to start curtailing the pace of bond purchases known as quantitative easing. Officials, who next meet June 18-19 in Washington, are weighing whether gains in employment are substantial enough to warrant reduced stimulus, and how much the economy is being held back by federal budget cuts.

“They pretty much say in the top line thought that the economy needs further strengthening,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Growth is modest, it’s just not there, and monetary policy can play a continued role, so it’s not clear why you would dial it back at this stage. There’s just not enough oomph in the economy.”

Stocks and Treasury yields extended declines after the report. The Standard & Poor’s 500 Index retreated 1.4 percent to close at a one-month low of 1,608.90. The yield on the benchmark 10-year Treasury note fell six basis points, or 0.06 percentage point, to 2.09 percent. Yields have declined from a one-year high of 2.17 percent on May 28.

Consumers, Autos

“Most districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales,” according to today’s report, which was compiled by the Minneapolis Fed.

Manufacturing increased across most regions as residential construction “was a boon” to suppliers, and four districts reported increased demand for lumber or wood products, the Fed report showed. The New York region reported “steady business activity” in manufacturing, and Boston firms said they’re “reasonably optimistic about the outlook.”

Vehicle sales “generally increased” across the nation while tourism showed “signs of strength” in several areas, the Fed said today. Nonfinancial business activity increased amid rising demand for technology, architecture, accounting and legal services.

Budget Cuts

Government spending cuts were a drag on the economy in some districts. Defense contractors noted “weakening activity” in the Cleveland region, and a military supplier in Richmond’s district reported that orders were being canceled or delayed.

The previous Beige Book report, released April 17, said that “overall economic activity expanded at a moderate pace.” That report showed gains in manufacturing, housing and autos that offset weakness in defense-related industries in some regions.

Today’s report marked the first time since the recession ended in June 2009 that the economy of the Dallas district, which includes Texas, northern Louisiana and southern New Mexico, was described as “strong.”

The Dallas Fed said manufacturing increased, retail sales improved and auto sales “held steady.” Demand for accounting services was “strong,” while law firms reported modest growth, transportation firms said conditions improved and housing sales and construction gained.

Toronto Speech

Dallas Fed President Richard Fisher, one of the most vocal critics of quantitative easing, yesterday repeated his calls for a reduction in monthly asset purchases.

“The recovery presently appears to be strong enough to propel hopes that consumption will help employment growth gradually improve over the long term,” he said in a speech in Toronto.

The Federal Open Market Committee said at its most recent meeting it will continue buying $85 billion in bonds each month until the labor market “improves substantially.” The committee also pledged on May 1 to keep the main interest rate near zero so long as the unemployment rate remains above 6.5 percent and the forecast for inflation doesn’t exceed 2.5 percent over one to two years.

Chairman Ben S. Bernanke, in May 22 testimony to Congress, said that the Fed “could” scale back the pace of asset purchases in the “next few meetings” if the labor market improves and the Fed is convinced the gains are sustainable.

St. Louis Fed President James Bullard and Boston’s Eric Rosengren have raised the prospect that the central bank could increase the monthly pace of asset purchases.

Inflation, Employment

Bullard said May 23 in London that more disinflation could prompt additional purchases, and Rosengren said May 29 in Minneapolis that “if the incoming economic data do not reflect improvements consistent with both elements of our dual mandate, I believe the Fed should be willing to increase asset purchases,” referring to the central bank’s goals to achieve stable prices and full employment.

Federal Reserve Bank of New York President William C. Dudley is among policy makers who want more time to evaluate the strength of the economy.

“I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out,” Dudley said in an interview on Bloomberg Television that aired May 22. “Three or four months from now I think you’re going to have a much better sense of, is the economy healthy enough to overcome the fiscal drag or not.”

Consumer spending in the U.S. unexpectedly declined in April for the first time in almost a year as incomes stagnated, indicating that the largest part of the economy will struggle to pick up without bigger job gains.

Growth Outlook

Economic growth will ease this quarter to a 1.7 percent annualized rate, according to the median forecast of economists in a Bloomberg survey. The second half will show improvement, with GDP projected to climb 2.2 percent in the third quarter and 2.6 percent in the fourth quarter.

The economy has “weathered political storms like the fiscal cliff, the Eurozone crisis and the slowdown in China, and all of these point to a fairly sustainable and solid recovery,” Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said before today’s Beige Book report. “We’re still adding jobs but it’s just not a lot of jobs. There aren’t as many as we’d like to see.”

Payrolls Gain

Companies in the U.S. boosted employment by 135,000 workers in May, figures from the Roseland, New Jersey-based ADP Research Institute showed today. The median forecast of 40 economists surveyed by Bloomberg called for an advance of 165,000.

A Labor Department report in two days may show that total employment, including government workers, rose by 165,000 in May, based on the median estimate of 86 economists in a Bloomberg survey. That’s the same as the gain in April.

The Institute for Supply Management’s non-manufacturing index climbed to 53.7 from 53.1 in April, according to a report from the Tempe, Arizona-based group today. A reading above 50 indicates expansion in the industries that make up almost 90 percent of the economy.

The advance may help the economy overcome the effects of government spending reductions known as sequestration, which began in March, and a payroll-tax increase at the start of the year may slow growth this quarter.

The increase in the payroll tax is slowing sales at Minneapolis-based Target Corp. (TGT), the second-largest U.S. discount retailer, where about a third of sales come from customers who earn less than $50,000 a year, according to John Mulligan, the firm’s chief financial officer.

“The payroll tax increase had a significant impact on them,” Mulligan said in a May 30 presentation. “They were struggling before. They’re struggling now. And we continue to see that in our business.”

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net


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