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Fed Sees 'Measured' Growth; Report Supports Case for Continued Stimulus

Wednesday, 28 November 2012 02:17 PM

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 Wednesday.

“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.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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.”

The Fed said 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.”

Tax Increases

Failure to avoid the $607 billion in tax increases and spending cuts set to take effect in January would pose a “substantial threat” to the recovery, Bernanke said in a Nov. 20 speech.

The report, released at midafternoon, had little discernible impact on financial markets.

The Beige Book reported “modest improvements” in hiring. “Labor markets were generally described as improving modestly by Boston, Atlanta, Chicago, Minneapolis, and Dallas,” the Fed said.

The Federal Open Market Committee on Oct. 24 said 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.”

Mortgages, Autos

Consumer spending in most districts increased at a moderate pace. Consumer lending increased in some districts amid higher demand for home mortgage loans and auto loans.

Retailers in New York expect to make up business lost because of superstorm Sandy, which also helped strengthen sales at home and garden stores in the Richmond district. San Francisco businesses noted “significant sales gains for consumer technology products” while those in Atlanta reported “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, the Fed chairman said in his Nov. 20 speech. At the same time, “a plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy,” he said.

Housing Recovery

The economy has gained strength from a recovery in housing, the industry at the heart of the 2007-2009 recession and financial crisis. The S&P Case-Shiller index of property values in 20 cities advanced 3 percent in September from a year earlier, the most since 2010.

Housing continued to show signs that it’s becoming a bigger pillar of strength for the economy as “construction and commercial real estate activity generally improved across districts,” according to the report. Home values continued to improve in most districts, while half of them “noted declining or tight inventories,” according to the report.

Builders in the Richmond district saw “significant pent-up demand in the first-time buyer segment” and more work on high- end homes for the first time in three years. Atlanta noted slight gains in home sales from a year ago and that investors “were more active in Florida” than elsewhere in the district. Cleveland said new single-family home construction increased.

Construction of new homes rose in October to the highest level in more than four years as builders broke ground on 894,000 homes at an annual pace. With mortgage rates at a record low, confidence among U.S. homebuilders climbed in November to a six-year high, according to a National Association of Home Builders/Well Fargo index.

Consumer Confidence

The optimism has spread to consumers, whose confidence in November reached a four-year high, according to the New York- based Conference Board. Consumer spending accounts for 70 percent of the economy.

At the same time, businesses have held back on hiring. 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.

The jobs report may be distorted by Sandy, which made landfall Oct. 29 near Atlantic City, New Jersey, and killed more than 100 people in 10 states. The worst damage was concentrated around New York City and the New Jersey coast, one of the most densely populated regions of the country.

Jobless Claims

Initial jobless claims surged to 451,000 on Nov. 9, according to the Bureau of Labor Statistics and fell to 410,000 on Nov. 16. Initial claims have averaged 376,000 so far in 2012.

“We should see unusually weak payroll readings in November and December,” Joseph LaVorgna, Carl Riccadonna and Brett Ryan, economists at Deutsche Bank Securities Inc., said in a Nov. 26 note.

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.

Firms like Home Depot Inc. and Lowe’s Cos., the nation’s largest and second largest home-improvement retailers, are poised to benefit from the rise in both homebuilding and reconstruction after the storm.

Home Depot

Home Depot’s stock surged 53 percent this year through Tuesday and Lowe’s rose 39 percent, compared to an 11 percent increase for the Standard & Poor’s 500 Index.

Other businesses may face less demand because of budget- cutting efforts in Washington.

Defense companies should brace for years of Pentagon spending cuts even if Congress averts automatic reductions set to begin in January, said Sean O’Keefe, who heads EADS North America.

Any debt-reduction compromise between Congress and President Barack Obama to avoid the fiscal cliff will probably still lead to deep cuts in defense and other programs, according to O’Keefe, chairman and chief executive officer at the U.S. unit of European Aeronautic, Defence & Space Co.

“Every industry and every company that is doing business contractually with the U.S. government is, I think, girding for the probability that there’s going to be a major adjustment, whether it’s by this mechanism or by some other” devised as an alternative, O’Keefe said in an interview that aired Nov. 22 on Bloomberg Television’s “Conversations With Judy Woodruff.”

The 11 companies in the S&P’s 500 Aerospace & Defense Index have lagged behind the S&P 500, rising 8 percent this year.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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The U.S. economy expanded at a "measured" pace in recent weeks as gains in consumer demand and housing were tempered by a slowdown inmanufacturing and the impact of superstorm Sandy, the Federal Reserve said.
Wednesday, 28 November 2012 02:17 PM
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