Reports Offer Grim Picture of Economy
9 of 12 Regions Tell Fed Of Business Slowdown
By Neil Irwin
The economy is slowing across the nation, the home-building sector is tanking more than even the pessimists could have imagined a few months ago and prices keep rising at an uncomfortably high rate.
Those are the unpleasant conclusions of several government reports released yesterday that, together, offer a picture of a U.S. economy being squeezed from all directions.
"Today's news confirms a lot of what we've been hearing and how people have been feeling about the economy," said Mark Vitner, a senior economist at Wachovia. "There is a clear case that the economy is lousy, but not a clear case that the economy is in recession."
The bad news was in line with economists' expectations and did not restrain a rally on Wall Street.
Economic conditions have weakened almost across the board in the past six weeks, according to the "beige book," a compilation of anecdotal reports about business conditions from around the United States prepared by the Federal Reserve.
Business has slowed in nine of the 12 regions in which the Fed divides the nation, and consumer spending was "softening across most of the country," the beige book said. The residential real estate and construction industry was "generally anemic," it said. Bright spots included the tourism sector, which has been buoyed by the weaker dollar, which is attracting visitors from abroad; agriculture, which is benefiting from high prices; and health-care businesses.
Industrial production, a key measure of the economy that is considered in deciding whether a recession has occurred, rose 0.3 percent last month, the Fed said in a separate report. However, the gain resulted from higher energy prices, which made the utilities' output appear higher. For the first three months of the year, manufacturing output was down 0.5 percent, consistent with a recession.
Also yesterday morning, the Commerce Department said that builders started 11.9 percent fewer units of housing last month than in February, a remarkable decline. The number housing starts, a particularly useful indicator of building activity, was down 63 percent last month from its January 2006 peak, according to an analysis by consulting firm Global Insight.
Paradoxically, the sharper the decline in home construction, the better it could be for the economy in the long run. There is currently too much supply of houses nationwide, and the less construction there is, the sooner supply and demand will come back into balance. Indeed, demand for homes has dropped so much that even the current depressed level of construction may be too much.
"It's bad news as long as housing starts are falling less than demand," said Christian Menegatti, an analyst at RGE Monitor, an economics research firm.
Even as the economy is softening, the prices consumers pay are rising. Consumer prices were up 0.3 percent last month, the Labor Department said yesterday, driven by sharp increases in the prices of natural gas and heating oil. When volatile food and energy prices are excluded, prices rose 0.2 percent.
So far, businesses have resisted passing along the higher costs of their raw materials to consumers -- which is keeping "core inflation," or the increase in the prices of goods other than food and energy, within a zone that the Federal Reserve can live with.
"It's hard for them to pass along higher costs when the consumer is on the ropes," Menegatti said.
The beige book described the manufacturers' and service businesses' varying responses to inflation. "Most manufacturers have or are planning to increase prices in response to rising input costs," it said. "While the response of service firms has been more mixed, in part due to differences in competitive pressures."
Inflation pressures notwithstanding, the Federal Reserve has been aggressively cutting interest rates in the past seven months, dropping the federal funds rate by three percentage points, to 2.25 percent.
Leaders of the Fed do not want to cut that rate much further, as they want to save room for further cuts if the economy gets worse. The central bank is likely to cut the rate another quarter of a percentage point during its April 29 to 30 meeting, as suggested by trading in futures markets, with a smaller chance that it will cut by half of a percentage point.