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US economy still sluggish: Fed's Beige Book

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(Globalpost/GlobalPost)

The US economy chugged along at a lackluster pace in recent weeks, according to a Federal Reserve report that left little reason to believe the Fed will abandon its loose monetary policy any time soon.

"Economic activity generally expanded at a modest to moderate pace," the Fed's Beige Book said, reporting a survey of conditions across the Fed's 12 districts.

Ten of the districts characterized economic expansion in those terms, while activity was slower in the Boston and Chicago districts.

The report cited government actions, such as the January 1 payroll tax increase and health-care reforms under the Affordable Care Act, as weighing on consumer spending -- crucial because it accounts for 70 percent of economic output.

"Most districts reported expansion in consumer spending, although retail sales slowed in several districts," the report said.

"Many district contacts commented on the expired payroll tax holiday and the Affordable Care Act as having restrained sales growth."

The ACA, enacted in 2010 and being phased in, was spearheaded by President Barack Obama to help rein in health care costs, a prime driver of the nation's yawning deficit and debt.

Commonly known as Obamacare, the law penalizes employers that fail to provide affordable health insurance coverage.

The Beige Book, based on contacts with business leaders, covered the mid-January through February 22 period.

Growth was helped by robust auto sales, an improving housing market, and tourism.

The manufacturing sector improved in almost all districts "but the majority noted that the pace of recovery was slow."

The report showed the troubled jobs market was picking up somewhat, even as entrenched high unemployment remained the central bank's overriding concern for the vitality of the world's largest economy.

"Labor market conditions generally improved, although several districts reported restrained hiring," the report said, noting that many districts had reported a rise in temporary employees.

"Employers in several districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff," it said.

The Beige Book came just ahead of the February jobs report. The Labor Department was widely expected to report Friday that the US jobless rate held at 7.9 percent for the second straight month amid modest job growth.

Payrolls firm ADP reported Wednesday that the private sector added 198,000 jobs last month, a bit better than the average of the last six months.

Fed Chairman Ben Bernanke repeatedly has warned that high unemployment -- and particularly long-term unemployment -- pose a grave danger to the economy's future.

He has warned that over time, unemployed workers' skills diminish and, discouraged, they can drop out of the work force altogether, altering the structure of the labor market.

The Beige Book reported "modest" price pressures. Despite the Fed's near-zero interest rate and $85 billion a month in asset purchases, or quantitative easing, to keep the economy afloat, inflation remained tame.

While it does not reflect the Fed's views, the Beige Book was prepared for the policy-setting Federal Open Market Committee, which meets on March 19-20.

Policymakers were concerned about the risks and costs of the extraordinary stimulus program at the January 29-30 FOMC meeting, according to the minutes of the meeting.

There was little change in conditions from the prior Beige Book, released on January 16.

"This Fed Beige Book... is unlikely to provide any reason for policy change at the 19-20 March FOMC meeting," said economist Roiana Reid of Nomura Global Economics.

IHS Global Insight analyst Erik Johnson said the research firm was sticking to the view that the unemployment rate will dictate the Fed's quantitative easing.

"We don't expect the labor market to improve substantially until next year," he said.

"Unemployment falling to 7.5 percent will likely lead the Fed to scale back the program by ending MBS purchases, but the program won't end entirely until later in the year."

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http://www.globalpost.com/dispatch/news/afp/130306/us-economy-still-sluggish-feds-beige-book-0