Fed Says Slowdown Is Spreading
Trouble in the nation’s manufacturing sector spread to other parts of the economy during June and July, the Federal Reserve reported Wednesday. The report revived fears the nation is losing its battle to keep out of recession.
The Fed said a survey of its 12 regional banks found an economy stuck in “slow growth or lateral movement” with cutbacks in production and employment, sluggish retail sales and drops in demand for office space and shipping services.
The survey, known as the “beige book,” boosted prospects that Fed policymakers will approve another rate cut, the seventh of the year, when they next meet Aug. 21.
The document’s bleak assessment of conditions around the country spooked investors, who have been on the lookout for signs the economy is either snapping back or headed for a new fall.
Key market measures dropped sharply in the wake of the survey’s midafternoon release, with the Nasdaq composite index shedding 61.43 points, or 3%, and the Dow Jones industrial average tumbling 165.24 points, or 1.6%.
“The market interpreted this as the dominoes going down, the beginning of the end,” said Sung Won Sohn, chief economist of Wells Fargo & Co. in Minneapolis.
Sohn said he believes investors overreacted and that the economy is actually reaching a bottom and heading back up. But he conceded, “When you’re scraping the bottom, it’s hard to see much good.”
The economy has stumbled badly over the last year with growth going from 4% annual rates to 0.7% this spring. But it has dodged outright recession, largely because the Fed slashed interest rates sharply to keep consumers buying and businesses producing.
Analysts, wondering how long the nation can stay finely balanced between rebound and collapse, are particularly sensitive to the sort of warning in Wednesday’s Fed survey that problems are spreading from the manufacturing sector to the rest of the economy.
Manufacturing output has dropped for nine straight months, according to the Fed’s separate industrial production report, and the central bank survey suggested that conditions were hardly on the mend.
The Commerce Department reported separately that inventories at the wholesale level declined by 0.2% in June. But sales at that level fell 0.9%, and the inventory-to-sales ratio, a measure of the time goods sit unsold on store shelves, rose to 1.33 months in June, its highest level in more than two years.
The Fed survey found that “reports of reduced work hours, lost overtime, forced furloughs, planned shutdowns and layoffs” were pervasive. Fed regional banks reported that, while domestic demand for manufactured goods was weak, companies in their districts traced much of the current malaise to softening international demand for U.S. goods.
More ominously, the regional banks said manufacturers’ problems were spreading to other parts of the economy. “Conditions in commercial real estate markets softened” in many parts of the country “with signs of additional weakening in July,” the survey said.
The survey reported “continued weak demand” for services, especially advertising, computing and data processing. Transportation firms and shipping companies experienced substantial cutbacks.
The demand for commercial bank loans, an important measure of the health of the business sector, was “flat to down,” the survey said.
