Latest Fed Report: All Quiet on the Economic Front

WASHINGTON — U.S economic growth is slowing while inflation remains subdued, the Federal Reserve Board found in its latest nationwide survey, a report that strengthens the widespread expectation among financial analysts that the Fed won’t raise interest rates in coming weeks.

The survey results, released Wednesday, showed the economy continuing to expand across the country, “although there were pockets of weakness,” according to the summary of conditions in the districts of the 12 Federal Reserve banks.

“Consumer spending growth was weaker than reported in the last [survey], with several districts reporting slower growth in retail and auto sales.”

“Although energy prices and some real estate prices were up, there were few reports of other price increases, and business contacts suggested that robust competition restrained upward pressure on final prices of goods,” the summary continued.

In interviews conducted before the survey report--known as the “beige book” after the color of its cover--was released, several Fed officials said they saw no indication that inflation is about to take off.

“Looking at the economy currently, we obviously have a very, very nice situation,” said J. Alfred Broaddus, president of the Richmond Federal Reserve Bank. “We have low unemployment, we have seen no acceleration of inflation at this stage of the game, and there are no imbalances. And clearly productivity is rising more than the numbers suggest.”

The report’s suggestion that the Reserve board probably won’t raise rates at its next meeting--on July 1 and 2--helped ameliorate a losing day on Wall Street. Bond prices rose, pushing yields lower. The Dow Jones average of industrial stocks, which had been down nearly 62 points before the report’s release, closed at 7,718.71, down 42.07.

The Labor Department, meantime, reported Wednesday that the productivity of American workers rose at a seasonally adjusted annual rate of 2.6% in the first quarter, the fastest rate in more than three years.

Broaddus said “there is always a risk” that inflation could get worse when economic growth has been as strong as it was earlier this year and when unemployment is already very low. Nevertheless, “there is a degree of relaxation [among Fed policymakers] that’s unusual,” given the circumstances.

“I don’t feel the sense of real urgency that I felt in 1994,” when short-term interest rates were unusually low and the Fed began raising them at a time of very rapid economic growth. At the beginning of 1994, overnight interest rates were just 3% and are now at 5.5%, following a quarter percentage point increase by the Fed in March.

“We are at a level of restraint now that is in the general neighborhood of where we need to be,” Broaddus said, expressing a view shared by several other Fed officials.

The beige book said retail sales were weaker in many Fed districts, but factory activity remained at high levels and was growing. In the San Francisco district, which covers the West, aerospace and related products led the way in manufacturing, and residential and commercial real estate markets were active.

At the same time, the report found many examples of the impact of the booming job market, which has pushed the nation’s unemployment rate to a nearly 24-year low of 4.8% in May.

Companies were having trouble hiring skilled professionals in the high-tech, construction and energy industries. The San Francisco district reported shortages of both skilled blue-collar and entry-level workers.

Associated Press contributed to this report.

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Business Productivity

Percentage change from previous quarter at annualized rate, seasonally adjusted:

First-quarter 1997: 2.6%

Source: Labor Department