Economy Growing at Subdued Pace, Fed Says

The U.S. economy is almost inflation-free and growing at a subdued pace, the Federal Reserve Board said Wednesday, suggesting, analysts say, that the central bank may cut interest rates at its next policy meeting.

“The national economy was growing at a generally modest pace at the end of 1995,” the Fed said in one of its periodic economic report cards. “Prices are generally remaining stable, but some areas still report shortages of skilled workers.”

Analysts said that’s about as clear a signal as the Fed can send that it will reduce the overnight bank lending rate from its present target of 5.5% to prevent a recession. The policy-setting Federal Open Market Committee will meet at the end of this month.

“Look for a [half-point] preemptive strike to combat widespread layoffs” at companies such as AT&T; Corp., said Richard Yamarone of Mountain Econometrics in Maplewood, N.J. “They’re in the business of worrying.”

Moreover, the lack of pressure on prices will make it easier for Fed officials to decide to reduce borrowing costs for banks--and thus for businesses and consumers--at the meeting Jan. 30-31, analysts said.

“Inflation is almost nonexistent,” said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Fla.

The economy’s weakened state was shown in two other reports released Wednesday. Shutdown-postponed figures from the Commerce Department show that the U.S. trade deficit in goods and services narrowed 2.5% in October to $8.042 billion--but only because American consumers’ purchases of imported products fell at a faster rate than U.S. exports declined.

Separately, the first edition of the index of leading indicators calculated by the Conference Board, a New York-based research group, showed a decline of 0.3% in November. That suggests that the economy may slow even more in the first half of this year. The drop was attributed to falling prices for raw materials, a sign of weaker industrial demand.

Retailers reported that holiday sales were below expectations and that “extensive discounting” didn’t help much, the Fed said in its so-called beige-book report. Manufacturing growth was described as uneven. Much of the weakness came in the auto industry.

Commercial real estate exhibited strength, but sales of single-family homes slowed as cold weather gripped parts of the U.S., the Fed said. Overall loan demand, though, remained stable.

Taken together, Wednesday’s reports portray an economy struggling to continue growing.

There were some bright spots in the October trade report. Exports to Mexico rebounded and overseas sales of industrial machinery and computers also set records.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Index of Leading Indicators

Seasonally adjusted; 1987=100

Nov. 1995: 100.4

Source Commerce Department

U.S. Trade

Overall deficit in good and services, in billions:

Oct. 1995: -$8.04

Source Commerce Department