Growth slowed in spring but didn't stall: Fed

Federal Reserve Board Chairman Ben Bernanke speaks at the International Monetary Conference in Atlanta, Georgia, June 7, 2011.

Credit: Reuters/Tami Chappell


By Glenn Somerville

WASHINGTON Wed Jun 8, 2011 9:37pm EDT

WASHINGTON (Reuters) - Growth slowed in some U.S. regions during May as costlier food and energy as well as supply disruptions stemming from a major earthquake in Japan in March took a toll, the Federal Reserve said on Wednesday.

"Reports from the 12 Fed districts indicated that economic activity generally continued to expand since the last report, though a few districts indicated some deceleration," the U.S. central bank's periodic "Beige Book" summary said.

The report on coast-to-coast conditions, prepared by the New York regional Fed bank and based on conditions on or before May 27, will be used by Fed monetary policy-makers at their next session on June 21-22.

The Beige Book's conclusions fit with other signs from recent government reports showing consumers struggling with higher gasoline prices and reduced job opportunities. The Labor Department said on Friday that employers added only 54,000 jobs in May and the unemployment rate hit 9.1 percent.

Fed Chairman Ben Bernanke acknowledged on Tuesday that growth had slowed but held out hope it would pick up in the second half of the year. He said policymakers were closely watching labor markets.

Analyst Michael Gapen of Barclays Capital Research said the Beige Book summary was "a bit more optimistic than the incoming data flow in recent weeks" but agreed that growth is likely to pick up later in the year.

"We believe that the main factors constraining activity -- higher energy prices and supply chain disruptions -- will be transitory in nature and we continue to believe that activity will accelerate in the second half of the year," Gapen said.

SOME LAYOFFS COMING

The Beige Book said there was "gradual improvement in labor market conditions" but it wasn't universal as Minneapolis cited several examples of expected layoffs and St Louis said jobs were likely going to be lost in the services sector.

The Fed said that respondents in New York, Philadelphia, Atlanta and Chicago reported some easing in the overall pace of growth last month, though Dallas said it picked up.

Manufacturing was still expanding overall but a number of districts said it too was not growing as quickly as it was earlier in the year.

Consumers, whose purchases of goods and services provide the economy's driving force, were holding steady but showing some signs of sticker shock last month.

"Elevated food and energy prices, as well as unfavorable weather in some parts of the country, were ... weighing on consumers' propensity to spend," the summary said.

There are ample signs of consumer stress, including a report on Wednesday from fast-food giant McDonald's showing a reported a lower-than-expected rise in May sales at established restaurants.

Roughly 800 of McDonald's 14,000 U.S. restaurants are located by interstate highways and the company said high gasoline prices were a factor crimping spending by customers.

HOPES FOR SECOND-HALF PICKUP

The Fed said new-car sales were "fairly robust" in much of the country but the impact from disruptions that followed the devastating March 11 earthquake in Japan was apparent.

"Widespread supply disruptions -- primarily related to the disaster in Japan -- were reported to have substantially reduced the flow of new automobiles into dealers' inventories, which in turn held down sales in some districts," the Fed said.

The damage caused to Japanese factories and supply lines affected more than just the auto industry. High-tech firms in Boston and Dallas said their business also suffered because of shortages of Japanese-sourced parts.

New homebuilding and real estate sales showed "widespread weakness" although loan demand was steady or rose in the commercial and industrial sector and the Fed noted that was substantial improvement in credit quality.

Prices for agricultural commodities, petroleum-based products and industrial metals rose in May and fuel surcharges were increasingly common.

But wage pressures were described as "contained" and an abundance of workers was keeping wage growth down, the Fed said.

(Reporting by Glenn Somerville, Editing by James Dalgleish)

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