Fed survey finds caution in shoppers

The economy grew at a slower pace in the late fall as shoppers watched their pennies heading into the busy holiday season.

The Federal Reserve’s new snapshot, released Wednesday, suggested the strains from a severe housing slump and a painful credit crunch were affecting the behavior of individuals and businesses alike -- making them somewhat more cautious.

“Reports on retail spending were downbeat in general,” the Fed’s “Beige Book” survey said. “Most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year,” the Fed added.

Spending by consumers and businesses is the lifeblood of the country’s economic activity. The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful that the country will weather the financial storm without falling into recession.

The Fed report found the national economy continued to grow during the survey period of October through mid-November but at a “reduced pace.” Of the 12 Fed regions surveyed, seven reported a slower pace of economic activity and the remainder generally pointed to “modest expansion or mixed conditions,” the Fed said.

The findings will figure prominently in discussions when Fed Chairman Ben S. Bernanke and his colleagues meet Dec. 11 to decide their next move on interest rates. Investors and some economists believe the Fed report, along with recent turbulence on Wall Street, would justify another rate reduction.

“The Fed realizes markets are fragile, and the ongoing dislocations we expect will lead the [Fed] to ease on Dec. 11,” said T.J. Marta, fixed-income strategist at RBC Capital Markets.

Fed Governor Donald L. Kohn, in a speech Wednesday, warned that if the financial turmoil seen in recent weeks were to persist, it could further crimp the flow of credit to people and businesses, raising risks to economic growth.

Besides “relatively soft” spending at the nation’s retailers, the Fed survey said manufacturing production was mixed. Demand was weak for products related to housing but was solid in other areas, including information technology equipment and machinery used in the energy sector and mining industries.

In a separate report from the Commerce Department, orders for costly manufactured goods dropped 0.4% in October. It was the third straight decline.

On the inflation front, the Fed report said expensive energy and food put “significant” pressure on the prices of products and services that rely heavily on these materials. But most other prices were largely stable or down a bit, the Fed said. That suggested that high energy and food prices weren’t spreading inflation through the economy.

National employment conditions are still mostly good, although construction and other jobs have taken a hit. In general, increases in workers’ wages were moderate. The positive forces of job creation and wage growth are helping to offset some of the negative forces of weaker home values and harder-to-get credit.

“Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amid the ongoing slowdown,” the Fed survey said.