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Fed sees growth as more ‘modest’

By Mark Hamrick · Bankrate.com
Wednesday, June 5, 2013
Posted: 5 pm ET

Deciphering the Federal Reserve's description of the economy is a little like doing a puzzle. Put together the pieces from the Fed's latest "Beige Book" survey of economic conditions around the country and you see hints that the central bank is seeing signs of a slowdown. The report points to generally "modest to moderate" activity since mid-April.

Private economists have been speaking about prospects for a slowdown of growth in the current quarter. The previous Fed report, which covered late February to early April, painted a picture that was generally moderate.

Still, the Fed's anecdotal accounts from its regional banks indicate that consumers are keeping up their spending. In the Dallas district, a beneficiary of the boom in energy production, economic growth is reported as "strong."

Two words: Real estate

The S-word (strong) also is said to describe residential real estate and construction activity. The report indicates that higher demand and low inventory of homes have resulted in multiple offers on properties. Nearly all regions tell of higher home sale prices. The report says real estate and construction activity picked up at a moderate or strong pace in all Fed districts. Around Kansas City, Mo., there were concerns that appraisals were not keeping up with real estate price increases. In the Minneapolis region, "many markets saw huge percentage increases in building permits from a year ago," the report says. Manhattan commercial real estate and construction activity are "particularly robust."

OK, what about jobs?

While the job market hasn't healed nearly enough to satisfy the Fed, the report notes that "hiring increased at a measured pace in several districts." It says that, in some cases, there has been "difficulty finding qualified workers."

The Labor Department is scheduled to release the May employment report on Friday. Economists expect it will show that the unemployment rate held steady at 7.5 percent. The Fed has set a target for an unemployment rate of 6.5 percent.

Cranking out widgets

While this week's report from the Institute for Supply Management indicated contraction in manufacturing during May, the Fed says manufacturing expanded in most districts since the previous Beige Book. Strength in home construction is continuing to help manufacturers who supply the building industry. But amid concerns about the "sequester," or forced federal budget cuts, the central bank's Cleveland and Richmond, Va., districts describe weakening in the defense sector.

What's it mean?

The tone of the Beige Book suggests the Fed will likely hold steady with monetary policy at its policy-setting meeting slated for June 18-19. There has been speculation that the central bank, led by Chairman Ben Bernanke, might begin to consider gearing down its asset purchases, from the current monthly pace of $85 billion. But the Federal Open Market Committee has pledged to continue the bond-buying "until the outlook for the labor market has improved substantially."

Paul Edelstein, director of financial economics with IHS Global Insight, says in a written statement that the Beige Book is "largely consistent with our projection for a near-term slowdown in growth due to the sequester, followed by a rebound to accelerated growth next year."

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