U.S. Economy Weakening to Influence Fed on Interest Rates

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WASHINGTON (AP) - The U.S.'s economic health deteriorated further in the early spring as shoppers buckled under the strains of the housing and credit debacles and a weaker employment climate.

Manufacturers and others businesses, meanwhile, were walloped by zooming prices for energy and other raw materials. However, their ability to jack up retail prices to customers was mixed, with some companies restrained by competitive pressures, according to the Federal Reserve's new snapshot of nationwide economic conditions released Wednesday.

"Economic conditions have weakened," the Fed report stated.

Many analysts believe the economy has fallen into a recession, predicting that economic activity contracted in the first three months of this year and is still ebbing now. Even Fed Chairman Ben Bernanke recently acknowledged for the first time that a recession was possible. That was a rare utterance of the "r" word for a Fed chief. The government later this month will report on the economy's first-quarter performance.

Janet Yellen, president of the Federal Reserve Bank of San Fransciso, in a speech Wednesday, said the economy "has all but stalled and could even contract over the first half of the year."

The report underscored the challenges facing Bernanke and his colleagues as they fight to keep the economy from sinking into a deep recession, while at the same time avoiding a flare-up of inflation. The report will figure prominently when the Fed meets April 29-30 to decide its next move on interest rates.

The Fed, which has been cutting rates since last September to bolster the economy, turned much more forceful in January, when conditions took another turn for the worse. Many economists believe the Fed will lower rates yet again at the April meeting to help shore things up.

The Fed snapshot "either portayed a slowdown in already subpar economic growth or a deepening recession," said Michael Gregory, economist at BMO Capital Markets, who predicted a quarter-point rate reduction.

Even with the rate reductions, though, consumers have turned more cautious, the Fed report suggested. Consumers are major shapers of the economy because their spending accounts for such a big chunk of overall economic activity.

"Consumer spending was characterized as softening across most of the country, with some districts reporting year-over-year declines in retail and or auto sales," the Fed report said. Merchants - other than auto dealers - reported that sales were "sluggish or declining" in 10 of the Fed's 12 regions, the report said. With inventories of unsold goods starting to pile up, retailers in the Richmond, Va., and San Francisco regions have canceled orders, the report noted.

Lofty energy prices are squeezing businesses' profits and pinching consumers, leaving them with less money to spend on other things. That is putting a damper on economic growth and also adding to inflation pressures.

Oil prices topped $115 a barrel for the first time Wednesday. Gasoline prices have soared, too, marching toward $4 a gallon at the retail level.

Businesses are having to cope with higher prices for food products, fuel and energy products and many raw materials, the Fed report said.

"Most manufacturers have or are planning to increase prices" in response to such rising costs, the Fed said. However, the response of companies in the service sector has been more mixed, the Fed said, "in part due to differences in competitive pressures."

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Overall, though, most of the Fed's regions reported "little change in retail price inflation," the Fed report said, suggesting that producers - and their profits - are especially getting hit by rising energy and raw material prices.

The government reported on Wednesday that consumer prices went up by a relatively modest 0.3 percent in March. Producer, or wholesale, prices, meanwhile rose a lot faster - by a whopping 1.1 percent.

On the manufacturing front, activity varied across the country.

The Fed regions of Chicago, Boston and Richmond, for instance, reported factory activity was rising - but not substantially. But, the regions of New York, Kansas City, Philadelphia and Dallas all reported weakening factory production. The regions of St. Louis and Cleveland saw activity hold steady, while the regions of Atlanta, Minneapolis and San Francisco said it was mixed.

Nonetheless, most Fed regions saw a "continued slide" in demand for goods related to housing construction, the Fed said. Uncertainty about economic conditions the Fed added, is leading to a "generally subdued" outlook for manufacturers.

In a separate report Wednesday, the Fed said big industry production nationwide rose 0.3 percent in March, an improvement from a drop of 0.7 percent in February.

The housing market continued to be stuck in a rut.

Home building remained sluggish throughout the nation, although "there were few signs of any quickening in the pace of deterioration," the Fed said. Declines or downward pressure on home prices were reported in many Fed regions. And, the regions of New York and San Francisco noted "some incipient price declines in areas that had previously shown resilience.'

The Commerce Department, in yet another report Wednesday, said home building sank in March to its lowest point in 17 years, fresh evidence of the depth of the housing market's woes.

The Fed's survey is based on information supplied by the Fed's 12 regional banks. The information was collected before April 7.

Copyright 2008 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. Active hyperlinks have been inserted by AOL.

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