Fed Says Economy Slowed Across U.S. Since Mid-October

By Scott Lanman

Dec. 3 (Bloomberg) -- The U.S. economy weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank, the Federal Reserve said in its regional economic survey.

Retail sales, tourism spending and manufacturing declined in most places, housing markets were “weak” and commercial real estate “weakened broadly,” the Fed said today in its Beige Book release, published two weeks before officials meet in Washington to set interest rates.

The report underscores the picture of a downfall that spurred Goldman Sachs Group Inc. and Morgan Stanley analysts to forecast a contraction in the economy this quarter of about 5 percent. Fed Chairman Ben S. Bernanke and his colleagues may cut interest rates further and consider adopting less conventional policies when they meet Dec. 15-16.

“We are looking at an economy that is not only in a recession, but a recession that is deepening rapidly,” former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co., said in an interview with Bloomberg Television. “It certainly is a gloomy report, but not I guess worse than what you would expect given the data coming in.”

The New York Fed said its regional economy “deteriorated substantially” since the last report in mid-October. The San Francisco Fed, which oversees the largest district, said business “weakened decidedly,” while the Chicago Fed said contacts “expressed concern over the potential length of this downturn.”

“Overall economic activity weakened across all Federal Reserve districts since the last report,” in mid-October, the Beige Book said.

Inflation pressures eased because of declining commodity prices, while wage pressures were “largely subdued,” today’s report showed.

Bright Spots

There were some bright spots: farms had a “relatively good harvest” and skilled labor was in demand in some places, the Fed said. Some businesses were able to profit from the weakness, with the Minneapolis and Dallas districts reporting “growing demand for bankruptcy services.”

Today’s report was prepared by the Minneapolis Fed, based on information collected on or before Nov. 24.

The U.S. economy officially entered a recession in December 2007, the panel that dates American business cycles declared Dec. 1. The National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts, said the economy was last in a recession from March through November 2001.

“We are in the middle of the worst quarter,” St. Louis Fed President James Bullard said yesterday in a Bloomberg Television interview. “Right now, we are looking for a pretty sharp decline in the fourth quarter, a little less sharp decline in the first quarter and then hopefully things will improve after that.”

A private report today indicated U.S. companies eliminated 250,000 jobs in November, prompting some economists to boost their estimates for the losses in the Labor Department’s Dec. 5 employment report. New predictions include a 450,000 drop in payrolls from Wachovia Corp. analysts and 400,000 from Goldman Sachs economists.

15-Year High

The jobless rate probably increased to 6.8 percent, the highest level since 1993, the median estimate in a Bloomberg News survey showed.

“Signs of labor market slowing were evident in several district reports,” the Fed said. San Francisco and Atlanta reported layoffs, and Dallas-district companies showed “particularly pronounced” job cuts in manufacturing.

Retailers were “widely discounting prices in anticipation of a slow holiday sales season” in some areas, the Fed said. Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001, the government said last week.

Prices for energy, fuel and “many raw materials and food products” were falling, the Beige Book said.

Consumer prices excluding food and fuel costs fell in October for the first time since 1982, according to government figures. The consumer price index plunged 1 percent in October, the most since records began in 1947, the Labor Department said.

Manufacturing Debacle

A report earlier this week showed manufacturing in the U.S. contracted in November at the fastest pace in 26 years. The Institute for Supply Management’s factory index dropped to 36.2; a reading of 50 is the dividing line between expansion and contraction.

The Fed said manufacturing “declined noticeably since the last report,” though the aerospace and food-processing industries had increased demand in some districts.

New-home sales in the U.S. fell in October to the lowest level in 17 years, the Commerce Department said last week, as the credit crunch deprived potential buyers of needed financing. Sales of new homes were down 40 percent from a year ago.

Residential real estate was running at a “slow pace” across the country, the Fed said, with sales down in most districts.

“Credit standards rose across the nation, with several districts noting increases in loan delinquencies and defaults, especially in the real estate sector,” the Fed said. “Credit conditions remained tight.”

The Dallas Fed, discussing the government’s $700 billion financial-rescue program, reported that capital injections “have led larger institutions to feel less constrained in their lending. At the same time, some smaller banks reported “scrutiny from regulators was making new deals more difficult to forge.”

The Beige Book’s regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.