Beige Book Suggests Fed Won't Raise Rates in August

Many portions of the nation's economy continued to slow in May and June, the Federal Reserve said Wednesday, adding to arguments that Federal Reserve policymakers won't need to raise interest rates when they meet later this month.

In it's "Current Economic Conditions" report, anecdotal evidence from the Fed's 12 regional districts suggested that the heady levels of economic activity seen earlier in the year seem to have slowed in such key areas as real estate, consumer spending and manufacturing.

The report is commonly referred to as the Beige Book because of the color of its cover.

The report paints a picture of more moderate economic growth, which dovetails with other recent data pointing to slower economic activity. That trend could continue to chip away at concerns that above-trend economic growth could lead to inflation.

The Fed raised interest rates six times since June 1999 in an attempt to slow growth and reduce the risk of inflation, but refrained from doing so at its most recent meeting in June, citing hints that the economy is heading to a more sustainable level of growth.

Evidence in the Fed's Beige Book seemed to indicate that the central bank's interest rate increases are indeed filtering through key areas of the economy.

One of the most assuring signs of a cooling of the economy for economists and policymakers is the evidence of a broad slowdown in consumer spending, which accounts for roughly two-thirds of the nation's economic output.

In virtually all districts, "reports of softness in consumer spending are more prevalent than in the last Beige Book," the report said. "Sales of apparel and seasonal items were noted as areas of weakness." The report also pointed to slower vehicle sales in five of the 12 Fed districts.

Real estate and construction activity also slowed in most districts, although it remained near historically high levels, the report said. Nine districts reported slower residential construction, and sales of existing homes were weaker in six districts. Commercial construction remained strong in most areas, but the report said that lenders in some areas are becoming more cautious in fear of overbuilding.

The report also suggested that manufacturing activity in most of the country grew more slowly in May and June. The report showed reduced demand for durable goods such as heavy equipment, agricultural equipment, lumber and metals, which helped to offset continued heavy demand for semiconductors, computers and other high-tech equipment.

Businesses around the country also said that input costs have been rising, especially for energy-intensive industries, such as transportation and heavy industry. However, competition and increasing productivity are largely preventing businesses from passing along those costs to their customers.

Despite the slowing activity in many areas of the economy, however, strong labor markets and shortages of workers in many areas will likely continue to concern policymakers.

In theory, strong job markets and low levels of unemployment can accelerate wage growth as businesses compete for workers, causing them to raise prices to keep up with rising labor costs.

"Nearly all districts reported that labor markets remain very tight," said the report. "The shortage of workers is reported across all types of industries, including manufacturing, services, transportation, energy extraction and information technology."

The report said, however, that gains in the average worker's output, or productivity, have offset rising labor costs, allowing business to absorb higher input costs and worker costs.